Enviva Inc. - Quarter Report: 2015 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

or

 

o         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)

 

 

 

(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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o No x

 

As of November 4, 2015, 11,908,072 common units and 11,905,138 subordinated units were outstanding.

 

 

Table of Contents

 

ENVIVA PARTNERS, LP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 

			Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			1
GLOSSARY OF TERMS			2
PART I — FINANCIAL INFORMATION			4
Item 1.	Financial Statements (unaudited)		4
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Statement of Changes in Partners’ Capital			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Condensed Consolidated Financial Statements			9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
Item 4.	Controls and Procedures		48
PART II — OTHER INFORMATION			49
Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		49
Item 6.	Exhibits		49

 

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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. While 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 amount of products that we are able to produce, which could be adversely affected by, among other things, operating difficulties;

 

·                  the volume of products that we are able to sell;

 

·                  the price at which we are able to sell products;

 

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

 

·                  changes in prevailing economic conditions;

 

·                  our ability to complete acquisitions, including acquisitions from our sponsor;

 

·                  unanticipated ground, grade or water conditions;

 

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

 

·                  environmental hazards;

 

·                  fires, explosions or other accidents;

 

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

 

·                  inability to acquire or maintain necessary permits;

 

·                  inability to obtain necessary production equipment or replacement parts;

 

·                  technical difficulties or failures;

 

·                  labor disputes;

 

·                  late delivery of raw materials;

 

·                  inability of our customers to take delivery of products or their rejection of delivery of products;

 

·                  changes in the price and availability of transportation; and

 

·                  our ability to borrow funds and access capital markets.

 

All forward-looking statements 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.

 

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GLOSSARY OF TERMS

 

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

 

C&F: cost and freight.

 

CIF: Cost, Insurance and Freight. Where a contract for the sale of goods contains CIF shipping terms, the seller is obligated to pay the costs and freight necessary to bring the goods to the named port of destination, but title and risk of loss are transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.

 

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

 

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

 

Cottondale plant: a wood pellet production plant in Cottondale, Florida, owned by Enviva Pellets Cottondale, LLC.

 

dry-bulk: describes commodities which are shipped in large, unpackaged amounts.

 

FIFO: first in, first out method of valuing inventory.

 

FOB: Free On Board. Where a contract for the sale of goods contains FOB shipping terms, the seller completes delivery when the goods pass the ship’s rail at the named port of shipment, and the buyer must bear all costs and risk of loss from such point.

 

GAAP: Generally Accepted Accounting Principles in the United States.

 

General Partner: Enviva Partners GP, LLC, the general partner of the Partnership.

 

Green Circle: Green Circle Bio Energy, Inc., the former owner of the Cottondale plant.

 

Hancock JV: a joint venture between the sponsor and Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company.

 

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

 

MTPY: metric tons per year.

 

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.

 

Partnership: Enviva Partners, LP.

 

Predecessor: Enviva, LP.

 

ramp or ramp-up: a period of time of increasing production following the startup of a plant or completion of a project.

 

Schedule K-1: an income tax document used to report the incomes, losses and dividends of a business’s partners and prepared for each partner individually.

 

Southampton plant: a wood pellet production plant in Southampton County, Virginia, owned by Enviva Pellets Southampton, LLC.

 

sponsor: Enviva Holdings, LP.

 

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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.

 

weighted average remaining term: the average of the remaining terms of our customer contracts, with each agreement weighted by the amount of product to be delivered each year under such agreement.

 

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.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.                                 Financial Statements (unaudited)

 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

		September 30, 2015			December 31, 2014
					(Predecessor)
Assets
Current assets:
Cash and cash equivalents		$	75,157		$	592
Accounts receivable, net of allowance for doubtful accounts of $0 in 2015 and $61 in 2014		44,464			21,998
Related party receivable		652			—
Inventories		25,366			18,064
Restricted cash		—			11,640
Deferred issuance costs		—			4,052
Prepaid expenses and other current assets		2,808			1,734
Total current assets		148,447			58,080
Property, plant and equipment, net of accumulated depreciation of $49.1 million in 2015 and $40.9 million in 2014		321,639			316,259
Intangible assets, net of accumulated amortization of $6.9 million in 2015 and $1.0 million in 2014		3,505			722
Goodwill		85,615			4,879
Debt issuance costs, net of accumulated amortization of $0.5 million in 2015 and $3.0 million in 2014		4,705			3,594
Other long-term assets		519			955
Total assets		$	564,430		$	384,489
Liabilities and Partners’ Capital
Current liabilities:
Accounts payable		$	8,975		$	4,013
Related party payable		5,459			2,354
Accrued and other current liabilities		16,399			8,159
Deferred revenue		575			60
Current portion of interest payable		—			73
Current portion of long-term debt and capital lease obligations		3,072			10,237
Total current liabilities		34,480			24,896
Long-term debt and capital lease obligations		173,767			83,838
Other long-term liabilities		1,176			1,227
Total liabilities		209,423			109,961
Commitments and contingencies
Partners’ capital:
Predecessor equity		—			271,495
General partner interest		—			—
Limited partner interests, 23.8 million units outstanding		352,004			—
Total Enviva Partners, LP partners’ capital		352,004			271,495
Noncontrolling partners’ interests		3,003			3,033
Total partners’ capital		355,007			274,528
Total liabilities and partners’ capital		$	564,430		$	384,489

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per unit amounts)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
					(Predecessor)						(Predecessor)
Product sales		$	115,081		$	75,186		$	335,857		$	208,332
Other revenue		1,507			924			4,704			2,827
Net revenue		116,588			76,110			340,561			211,159
Cost of goods sold, excluding depreciation and amortization		96,238			63,277			279,858			184,887
Depreciation and amortization		6,294			4,767			21,587			14,308
Total cost of goods sold		102,532			68,044			301,445			199,195
Gross margin		14,056			8,066			39,116			11,964
General and administrative expenses		4,779			2,837			13,176			7,399
Income from operations		9,277			5,229			25,940			4,565
Other income (expense):
Interest expense		(2,887		)	(2,124		)	(7,576		)	(6,619		)
Related party interest expense		—			—			(1,097		)	—
Early retirement of debt obligation		—			—			(4,699		)	(73		)
Other income		9			4			24			16
Total other expense, net		(2,878		)	(2,120		)	(13,348		)	(6,676		)
Income (loss) before income tax expense		6,399			3,109			12,592			(2,111		)
Income tax expense		1			4			2,657			12
Net income (loss)		6,398			3,105			9,935			(2,123		)
Less net loss attributable to noncontrolling partners’ interests		14			19			30			61
Net income (loss) attributable to Enviva Partners, LP		$	6,412		$	3,124		$	9,965		$	(2,062	)
Less: Predecessor loss to May 4, 2015 (prior to IPO)								$	(2,132	)
Enviva Partners, LP partners’ interest in net income from May 4, 2015 to September 30, 2015								$	12,097
Net income per common unit:
Basic		$	0.27					$	0.51
Diluted		$	0.27					$	0.50
Net income per subordinated unit:
Basic		$	0.27					$	0.51
Diluted		$	0.27					$	0.50
Weighted average number of limited partner units outstanding:
Common — basic		11,906						11,906
Common — diluted		12,193						12,179
Subordinated — basic and diluted		11,905						11,905
Distribution declared per limited partner unit for respective periods		$	0.4400					$	0.7030

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Partners’ Capital

(In thousands)

(Unaudited)

 

					General Partner -			Partners’ Capital
		Net Parent			Incentive Distribution			Common Units – Public					Common Units - Sponsor					Subordinated Units - Sponsor					Non- controlling			Total Partners’
		Investment			Rights			Units		Amount			Units		Amount			Units		Amount			Interest			Capital
Balance as of December 31, 2014		$	271,495		$	—		—		$	—		—		$	—		—		$	—		$	3,033		$	274,528
Conveyance of Enviva Pellets Southampton, LLC to Hancock JV		(91,696		)	—			—		—			—		—			—		—			—			(91,696		)
Contribution of Enviva Cottondale Acquisition II, LLC		132,765			—			—		—			—		—			—		—			—			132,765
Distribution to sponsor		(4,152		)	—			—		—			—		—			—		—			—			(4,152		)
Expenses incurred by sponsor		3,088			—			—		—			—		—			—		—			—			3,088
Net income from January 1, 2015 to May 4, 2015 (prior to IPO)		(2,132		)	—			—		—			—		—			—		—			(9		)	(2,141		)
Balance as of May 4, 2015 (prior to IPO)		309,368			—			—		—			—		—			—		—			3,024			312,392
Net proceeds from initial public offering, net of deferred IPO costs		—			—			11,500		209,065			—		—			—		—			—			209,065
Distribution to sponsor		(172,550		)	—			—		—			—		—			—		—			—			(172,550		)
Allocation of net Parent investment to sponsor		(136,818		)	—			—		—			405		4,503			11,905		132,315			—			—
Issuance of common units under Long-Term Incentive Plan		—			—			1		—			—		—			—		—			—			—
Cash distribution, phantom units and distribution equivalent rights		—			—			—		(3,101		)	—		(107		)	—		(3,131		)	—			(6,339		)
Unit-based compensation		—			—			—		363			—		—			—		—			—			363
Net income - May 5, 2015 through September 30, 2015		—			—			—		5,843			—		206			—		6,048			(21		)	12,076
Partners’ Capital, September 30, 2015		$	—		$	—		11,501		$	212,170		405		$	4,602		11,905		$	135,232		$	3,003		$	355,007

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2015			2014
					(Predecessor)
Net income (loss)		$	9,935		$	(2,123	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		21,621			14,335
Amortization of debt issuance costs and original issue discount		1,229			1,516
General and administrative expense incurred by Enviva Holdings, LP		475			—
Allocation of income tax expense from Enviva Cottondale Acquisition I, LLC		2,663			—
Early retirement of debt obligation		4,699			73
Unit-based compensation expense		363			2
Other operating		(74		)	46
Change in operating assets and liabilities:
Accounts receivable		(9,954		)	(4,454		)
Prepaid expenses and other assets		(757		)	2,331
Inventories		(4,985		)	3,833
Other long-term assets		494			268
Accounts payable, accrued liabilities and other current liabilities		13,405			5,541
Accrued interest		33			(286		)
Deferred revenue		515			(536		)
Other long-term liabilities		—			384
Net cash provided by operating activities		39,662			20,930
Cash flows from investing activities:
Purchases of property, plant and equipment		(4,129		)	(13,860		)
Restricted cash		—			43
Payment of acquisition related costs		(3,573		)	—
Proceeds from the sale of equipment		277			25
Net cash used in investing activities		(7,425		)	(13,792		)
Cash flows from financing activities:
Principal payments on debt and capital lease obligations		(183,183		)	(40,117		)
Cash paid related to debt issuance costs		(5,123		)	—
Termination payment for interest rate swap derivatives		(146		)	—
Release of cash restricted for debt service		11,640			—
Cash restricted for debt service		—			(4,600		)
IPO proceeds, net		215,050			—
Cash distribution to sponsor		(176,702		)	—
Cash paid for deferred IPO costs		(1,790		)	—
Cash distribution to unitholders		(6,159		)	—
Proceeds from contributions from sponsor		10,236			—
Proceeds from debt issuance		178,505			37,000
Net cash provided by (used in) financing activities		42,328			(7,717		)
Net increase (decrease) in cash and cash equivalents		74,565			(579		)
Cash and cash equivalents, beginning of period		592			3,558
Cash and cash equivalents, end of period		$	75,157		$	2,979

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2015			2014
					(Predecessor)
Non-cash investing and financing activities:
The Partnership acquired property, plant and equipment in non-cash transactions as follows:
Property, plant and equipment acquired and included in accounts payable and accrued liabilities		$	1,431		$	327
Property, plant and equipment acquired and included in other assets as notes receivable		—			175
Property, plant and equipment acquired under capital leases		—			290
Property, plant and equipment acquired under notes payable		39			—
Property, plant and equipment transferred from prepaid expenses		173			—
Property, plant and equipment transferred from inventory		146			—
Contribution of Enviva Pellets Cottondale, LLC non-cash net assets		122,529			—
Application of deferred IPO costs to partners’ capital		5,913			—
IPO costs included in accounts payable and accrued liabilities		21			—
Distributions included in liabilities		179			—
Debt issuance costs included in accrued liabilities		66			—
Conveyance of Enviva Pellets Southampton, LLC to Hancock JV		91,696			—
Distribution of Enviva Pellets Cottondale, LLC assets to sponsor		354			—
Non-cash adjustments to financed insurance and prepaid expenses		105			—
Gain on disposal included in receivables		8			—
Financed insurance		—			2,157
Depreciation capitalized to inventories		409			242
Early retirement of debt obligation:
Deposit applied to principal outstanding under promissory note		—			391
Deposit applied to accrued interest under promissory note		—			154
Non-cash capital contributions from sponsor		339			1,083
Supplemental information:
Interest paid		$	7,369		$	5,181

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(In thousands, except per unit amounts and unless otherwise noted)
(Unaudited)

 

(1)   Description of Business and Basis of Presentation

 

Enviva Partners, LP (the “Partnership”) is a Delaware limited partnership formed on November 12, 2013 as a wholly owned subsidiary of Enviva Holdings, LP (the “sponsor”). Through its interests in Enviva, LP (the “Predecessor”) and Enviva GP, LLC, the general partner of the Predecessor, the Partnership supplies utility-grade wood pellets to major power generators under long-term, take-or-pay off-take contracts. The Partnership acquires wood fiber from landowners and other suppliers, dries and processes that fiber into wood pellets at industrial-scale production plants and transports those products to deep-water marine terminals where they are stored and then distributed to customers. Wood pellets are sold principally to Northern European power generators who use them as a substitute fuel for coal in dedicated biomass or co-fired coal power plants.

 

The Partnership operates five industrial-scale wood pellet production plants located in the Mid-Atlantic and Gulf Coast regions of the United States. Wood pellets are exported from a wholly-owned deep-water marine terminal in Chesapeake, Virginia and from a third-party deep-water marine terminal in Mobile, Alabama under a long-term contract. Production from the Partnership’s wood pellet production plant in Cottondale, Florida (the “Cottondale plant”) is exported from a third-party terminal in Panama City, Florida, under a long-term contract.

 

On May 4, 2015, the Partnership completed an initial public offering (the “IPO”) of common units representing limited partner interests in the Partnership (see Note 2, Initial Public Offering). Prior to the closing of the IPO, the sponsor contributed to the Partnership its interests in the Predecessor, Enviva GP, LLC, and Enviva Cottondale Acquisition II, LLC (“Acquisition II”), which was the owner of Enviva Pellets Cottondale, LLC (“Cottondale”). The primary assets contributed to the Partnership by the sponsor included five industrial-scale wood pellet production plants and a wholly-owned deep-water terminal and long-term contractual arrangements to sell the wood pellets produced at the plants to third parties.

 

Until April 9, 2015, Enviva MLP Holdco, LLC, a wholly-owned subsidiary of the sponsor, was the owner of the Predecessor, and Enviva Cottondale Acquisition I, LLC (“Acquisition I”), a wholly-owned subsidiary of the sponsor, was the owner of Acquisition II.

 

In January 2015, the sponsor acquired Green Circle Bio Energy, Inc. (“Green Circle”), which owned the Cottondale plant. Acquisition I contributed it to the Partnership in April 2015 in exchange for subordinated units in the Partnership. Prior to such contribution, the sponsor converted Green Circle into a Delaware limited liability company and changed the name of the entity to “Enviva Pellets Cottondale, LLC.”

 

In connection with the closing of the Senior Secured Credit Facilities (as defined below) (see Note 10, Long-Term Debt and Capital Lease Obligations), on April 9, 2015, the Partnership, the Predecessor and the sponsor executed a series of transactions that were accounted for as common control transactions and are referred to as the “Reorganization:”

 

·                  Under a Contribution Agreement, the Predecessor conveyed 100% of the outstanding limited liability company interest in Enviva Pellets Southampton, LLC, which owns a wood pellet production plant in Southampton County, Virginia (the “Southampton plant”), to a joint venture between the sponsor and Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company (the “Hancock JV,” which is consolidated by the sponsor); and

 

·                  Under a separate Contribution Agreement by and among the sponsor, Enviva MLP Holdco, LLC, Acquisition I, the Predecessor and the Partnership, the parties executed the following transactions:

 

·                  The Predecessor distributed cash and cash equivalents of $1.7 million and accounts receivable of $2.4 million to the sponsor;

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(In thousands, except per unit amounts and unless otherwise noted)
(Unaudited)

 

·                  The sponsor contributed to the Partnership 100% of the outstanding limited liability company interest in Acquisition II, the former owner of Cottondale (formerly Green Circle Bio Energy, Inc.), which owns the Cottondale plant;

 

·                  The sponsor contributed 100% of the outstanding interests in each of the Predecessor and Enviva GP, LLC to the Partnership; and

 

·                  The Partnership used $82.2 million of the proceeds from borrowings under the Senior Secured Credit Facilities to repay all outstanding indebtedness under the Predecessor’s $120.0 million senior secured credit facilities (the “Prior Senior Secured Credit Facilities”) and related accrued interest (see Note 10, Long-Term Debt and Capital Lease Obligations).

 

As a result of the Reorganization, the Partnership became the owner of the Predecessor, Enviva GP, LLC and Acquisition II.

 

On April 9, 2015, the Partnership also entered into a Master Biomass Purchase and Sale Agreement (the “Biomass Purchase Agreement”) pursuant to which the Hancock JV sells to the Partnership, at a fixed price per metric ton, wood pellets initially sourced from the production at the Southampton plant. The purchased wood pellets from the Hancock JV are sold to the Partnership’s customers under existing off-take contracts.

 

In connection with the closing of the IPO, under a Contribution Agreement by and among the sponsor, Enviva MLP Holdco, LLC, Acquisition I, the Predecessor and the Partnership, Acquisition II merged into the Partnership and the Partnership contributed its interest in Cottondale to the Predecessor.

 

The accompanying unaudited interim condensed consolidated financial statements (“interim statements”) of the Partnership have been prepared in connection with the completed IPO of common units representing limited partner interests in the Partnership. The accompanying interim statements include the accounts of the Predecessor and its subsidiaries and were prepared using the Predecessor’s historical basis. Prior to the IPO, certain of the assets and liabilities of the Predecessor were transferred to the Partnership within the sponsor’s consolidated group in a transaction under common control and, as such, the condensed consolidated historical financial statements of the Predecessor are presented as the Partnership’s historical financial statements as we believe they provide a representation of our management’s ability to execute and manage our business plan. As entities under common control, the contributed assets were recorded on the balance sheet at the Predecessor’s historical basis rather than fair value. The financial statements were prepared using the Predecessor’s historical basis in the assets and liabilities, and include all revenues, costs, assets and liabilities attributed to the Predecessor. The financial statements for periods prior to the Reorganization have been recast to reflect the contribution of the sponsor’s interests in the Predecessor and Enviva GP, LLC as if the contributions occurred at the beginning of the periods presented and the contribution of the sponsor’s interests in Acquisition II as if the contribution occurred on January 5, 2015. Enviva Pellets Southampton, LLC is not included in the Partnership’s condensed consolidated financial statements effective April 9, 2015, the date of the Reorganization.

 

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Notes to Condensed Consolidated Financial Statements

 

(In thousands, except per unit amounts and unless otherwise noted)
(Unaudited)

 

The following table outlines the changes in consolidated net assets resulting from the contribution of Acquisition II to the Partnership and the conveyance of Enviva Pellets Southampton, LLC to the Hancock JV:

 

		Enviva Pellets Southampton, LLC			Acquisition II			Total
Assets:
Cash		$	—		$	10,236		$	10,236
Accounts receivable		(12		)	13,457			13,445
Inventories		(4,040		)	6,095			2,055
Prepaid expenses and other current assets		(130		)	507			377
Property, plant and equipment, net		(91,537		)	108,736			17,199
Intangibles, net		—			8,700			8,700
Goodwill		—			80,736			80,736
Other assets		—			58			58
Total assets		(95,719		)	228,525			132,806
Liabilities:
Accounts payable		(536		)	3,597			3,061
Accrued liabilities		(2,362		)	4,849			2,487
Long-term debt and capital leases		(1,076		)	87,314			86,238
Other liabilities		(49		)	—			(49		)
Total liabilities		(4,023		)	95,760			91,737
Net assets contributed to Partnership		$	(91,696	)	$	132,765		$	41,069

 

The following is a reconciliation of the Predecessor’s partners’ capital as of December 31, 2014 and total net assets contributed to the Partnership prior to the May 4, 2015 IPO:

 

Predecessor’s partners’ capital — December 31, 2014		$	274,528
Conveyance of Enviva Pellets Southampton, LLC to Hancock JV		(91,696		)
Distribution of cash to sponsor		(4,152		)
Contribution of Acquisition II		132,765
Expenses incurred by sponsor		3,088
Net loss January 1, 2015 to May 4, 2015 (prior to IPO) attributable to Predecessor		(2,132		)
Net loss January 1, 2015 to May 4, 2015 (prior to IPO) attributable to noncontrolling partners’ interest		(9		)
Predecessor’s partners’ capital — May 4, 2015 (prior to IPO)		$	312,392

 

The following summarized unaudited pro forma consolidated income statement information for the nine months ended September 30, 2015 and 2014 assumes that the contribution of the sponsor’s interests in the Predecessor and Enviva GP, LLC occurred on January 1, 2014 and that the contribution of the sponsor’s interests in Acquisition II occurred on January 1, 2014. The summarized unaudited pro forma financial results are prepared for comparative purposes only. The summarized unaudited pro forma financial results may not be indicative of the results that would have occurred if the contributions had been completed as of January 1, 2014 or the results that will be attained in the future.

 

		Nine Months Ended September 30,
		2015			2014
					(Predecessor)
Net revenue		$	340,561		$	316,108
Net income		9,935			13,751
Less net loss attributable to noncontrolling partners’ interests		30			61
Net income attributable to Enviva Partners, LP		9,965			13,812
Net income per limited partner unit:
Common — diluted		$	0.41
Subordinated — diluted		$	0.41

 

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Notes to Condensed Consolidated Financial Statements

 

(In thousands, except per unit amounts and unless otherwise noted)
(Unaudited)

 

The following table presents the changes to previously reported amounts of the Partnership’s condensed consolidated statement of operations for the three months ended March 31, 2015 included in the Partnership’s quarterly report on Form 10-Q for the quarter ended March 31, 2015 to reflect the contribution of Acquisition II as if it had been contributed on January 5, 2015, the date on which the sponsor acquired Green Circle:

 

		Three Months Ended March 31, 2015
		As Reported			Acquisition II			Total
Product sales		$	70,983		$	42,162		$	113,145
Other revenue		1,168			—			1,168
Net revenue		72,151			42,162			114,313
Cost of goods sold, excluding depreciation and amortization		64,294			30,106			94,400
Depreciation and amortization		4,658			3,601			8,259
Total cost of goods sold		68,952			33,707			102,659
Gross margin		3,199			8,455			11,654
General and administrative expenses		3,310			460			3,770
(Loss) income from operations		(111		)	7,995			7,884
Other income (expense):
Interest expense		(1,916		)	(800		)	(2,716		)
Other income		3			3			6
Total other expense, net		(1,913		)	(797		)	(2,710		)
(Loss) income before income tax expense		(2,024		)	7,198			5,174
Income tax expense		—			2,663			2,663
Net (loss) income		(2,024		)	4,535			2,511
Less net loss attributable to noncontrolling partners’ interests		8			—			8
Net (loss) income attributable to Enviva Partners, LP		$	(2,016	)	$	4,535		$	2,519

 

The Partnership’s condensed consolidated statement of operations for the nine months ended September 30, 2015 includes income tax expense of $2.7 million related to the activities of the Cottondale plant, from the date of acquisition on January 5, 2015 through April 8, 2015. During this period, Cottondale was a corporate subsidiary of Acquisition II, a wholly-owned corporate subsidiary of Acquisition I, the corporate parent of the consolidated group. On April 7 and 8, 2015, Cottondale and Acquisition II, respectively, converted to limited liability companies. Prior to the contribution of Acquisition II to the Partnership on April 9, 2015, the financial results of Acquisition II and Cottondale were included in the consolidated federal income tax return of the tax paying entity, Acquisition I. As the income tax expense recorded for the period January 5, 2015 through April 9, 2015 related to the time that the Cottondale plant and Acquisition II were corporate subsidiaries of Acquisition I’s consolidated group, the income tax expense is reflected as an equity contribution on the books of Cottondale.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods presented herein and are of a normal recurring nature. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto included in the prospectus of Enviva Partners, LP as filed with the SEC on April 29, 2015 in connection with the IPO.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

(2)         Initial Public Offering

 

On May 4, 2015, the Partnership completed an IPO of 11,500,000 common units, including common units issued upon exercise of the underwriter’s option, representing limited partner interests in the Partnership at a price to the public of $20.00 per unit ($18.80 per common unit, net of underwriting discounts and commissions) and constituting approximately 48.3% of the Partnership’s outstanding limited partner interests. The IPO was registered pursuant to a registration statement on Form S-1 originally filed on October 27, 2014, as amended (Registration No. 333-199625), that was declared effective by the SEC on April 28, 2015. The net proceeds from the IPO of approximately $215.1 million after deducting the underwriting discount and structuring fee were used to (i) repay intercompany indebtedness related to the acquisition of Green Circle in the amount of approximately $83.0 million and (ii) distribute approximately $86.7 million to the sponsor related to its contribution of assets to the Partnership in connection with the IPO, with the Partnership retaining $45.4 million for general partnership purposes, including offering expenses.

 

The sponsor owns 405,138 common units and all of the Partnership’s subordinated units, representing 51.7% of the Partnership’s limited partner interests. Enviva Partners GP, LLC, the Partnership’s general partner and a wholly-owned subsidiary of the sponsor (the “General Partner”), owns all the outstanding incentive distribution rights (“IDRs”).

 

(3)         Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Partnership and its subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Certain amounts for the nine months ended September 30, 2014 have been reclassified to conform to the current presentation.

 

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 the Partnership’s unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

Segment and Geographic Information

 

Operating segments are defined as components of an enterprise about which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Partnership views its operations and manages its business as one operating segment. All long-lived assets of the Partnership are located in the United States.

 

Other Comprehensive Income (Loss)

 

Comprehensive loss includes net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that, under GAAP, are recorded as an element of partners’ capital but are excluded from net loss. The Partnership had no components of other comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014.

 

Net Income per Limited Partner Unit

 

The Partnership computes net income per unit using the two-class method as the Partnership has more than one class of participating securities, including common units, subordinated units, certain equity based-compensation awards and incentive distribution rights. The Partnership bases its calculation of net income per unit on the

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

weighted-average number of common and subordinated limited partner units outstanding during the period. Diluted net income per unit includes the effects of potentially dilutive time-based and performance-based phantom units on our common units.

 

The General Partner owns a non-economic interest in the Partnership, which does not entitle it to receive cash distributions, but owns all of the outstanding IDRs as of September 30, 2015. Pursuant to the partnership agreement, IDRs represent the right to receive increasing percentages (ranging from 15% to 50%) of quarterly distributions from operating surplus after the minimum quarterly distribution and certain target distribution levels have been achieved. Net income per unit applicable to limited partners (including the holder of subordinated units) is computed by dividing limited partners’ interest in net income by the weighted-average number of outstanding common and subordinated units.

 

Income Taxes

 

The Partnership and sponsor are pass-through entities and are not considered taxable entities for federal income tax purposes. Therefore, there is not a provision for U.S. federal and most state income taxes in the accompanying condensed consolidated financial statements. The Partnership’s net income or loss is allocated to its partners in accordance with the partnership agreement. The partners are taxed individually on their share of the Partnership’s earnings. At September 30, 2015 and December 31, 2014, the Partnership and sponsor did not have any liabilities for uncertain tax position or gross unrecognized tax benefit. Some states impose franchise and capital taxes on the Partnership. Such taxes are not material to the condensed consolidated financial statements and have been included in other income (expense) as incurred. Income tax expense for the nine months ended September 30, 2015 includes expense incurred by Acquisition II prior to being contributed to the Partnership.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of short-term, highly liquid investments readily convertible into cash with an original maturity of three months or less.

 

Restricted Cash

 

The Predecessor funded a restricted debt service reserve account in connection with the Prior Senior Secured Credit Facilities (see Note 10, Long-Term Debt and Capital Lease Obligations). The restricted debt service reserve account was released as a result of the repayment in full of the Prior Senior Secured Credit Facilities on April 9, 2015.

 

Revenue Recognition

 

The Partnership primarily earns revenue by supplying wood pellets to customers under long-term, U.S. dollar-denominated contracts (also referred to as “off-take” contracts). The Partnership refers to the structure of the contracts as “take-or-pay” because they include a firm obligation to take a fixed quantity of product at a stated price and provisions that ensure the Partnership will be made whole in the case of the customer’s failure to accept all or a part of the contracted volumes or for termination by the customer. Each contract defines the annual volume of wood pellets that the customer is required to purchase and the Partnership is required to sell, the fixed price per metric ton for product satisfying a base net calorific value and other technical specifications, and, in some instances, provides for price adjustments for actual product specification and changes in underlying costs. Revenues from the sale of wood pellets are recognized when the goods are shipped, title passes, the sales price to the customer is fixed and collectability is reasonably assured.

 

Depending on the specific off-take contract, shipping terms are either Cost, Insurance and Freight (“CIF”) or Free on Board (“FOB”). Under a CIF contract, the Partnership procures and pays for shipping costs, which include insurance and all other charges, up to the port of destination for the customer. These costs are included in the price to the customer and, as such, are included in revenue and cost of goods sold. Under a FOB contract, the customer is directly responsible for shipping costs.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

In some cases, the Partnership may purchase shipments of product from a third-party supplier and resell them in back-to-back transactions that immediately transfer title and risk of loss to the ultimate purchaser. Thus, the revenue from these transactions is recorded net of costs paid to the third-party supplier. The Partnership records this revenue as “Other revenue.”

 

In instances when a customer requests the cancellation, deferral or acceleration of a shipment, the customer may pay a fee, including reimbursement of any incremental costs incurred by the Partnership, which is included in revenue.

 

Cost of Goods Sold

 

Cost of goods sold includes the costs to produce and deliver wood pellets to customers. Raw material, production and distribution costs associated with delivering wood pellets to the ports and third-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 the facilities. These costs are reflected in cost of goods sold when inventory is sold. Distribution costs associated with shipping wood pellets to customers and amortization are expensed as incurred. Inventory is recorded using 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.

 

The Partnership entered into the Biomass Purchase Agreement pursuant to which the Hancock JV sells certain volumes of wood pellets per month to the Partnership at a fixed price per metric ton. The pellets purchased from the Hancock JV are sold to the Partnership’s customers under existing off-take contracts (see Note 11, Related Party Transactions).

 

Additionally, the purchase price of acquired customer contracts that were recorded as intangible assets are amortized as deliveries are made during the contract term.

 

Derivative Instruments

 

The Predecessor used derivative financial instruments to manage its exposure to fluctuations in interest rates on long-term debt as required per the terms of the Prior Senior Secured Credit Facilities (see Note 10, Long-Term Debt and Capital Lease Obligations). The Partnership does not hold or issue derivative financial instruments for trading or speculative purposes. The Predecessor accounted for the interest rate swaps by recognizing all derivative financial instruments on the condensed consolidated balance sheets at fair value. The Predecessor’s interest rate swap agreements were not designated as hedges; therefore, the gain or loss was recognized in the condensed consolidated statements of operations in interest expense. In connection with the repayment of the Prior Senior Secured Credit Facilities in April 2015 (see Note 10, Long-Term Debt and Capital Lease Obligations), the Predecessor terminated the interest rate swaps and paid a termination fee of $0.1 million. The Partnership does not currently hold any interest rate swaps or derivative financial instruments.

 

Debt Issuance Costs and Original Issue Discount

 

Debt issuance costs represent legal fees and other direct expenses associated with securing the Partnership’s credit agreements and are capitalized on the condensed consolidated balance sheets as other long-term assets. Original issue discounts are recorded on the condensed consolidated balance sheets within the carrying amount of long-term debt. Debt issuance costs and original issue discount are amortized over the term of the related debt using straight line amortization, which approximates the effective interest rate method.

 

The Predecessor and the Partnership primarily incurred debt issuance costs and original issue discount in connection with the Prior Senior Secured Credit Facilities and Senior Secured Credit Facilities, respectively (see Note 10, Long-Term Debt and Capital Lease Obligations). Debt issuance costs, net at September 30, 2015 and December 31, 2014, was $4.7 million and $3.6 million, respectively.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

Gains or losses on debt extinguishment include any associated unamortized debt issuance costs and original issue discount.

 

Deferred Issuance Costs

 

Deferred issuance costs primarily consist of legal, accounting, printing and other fees relating to the IPO. These costs were offset against the proceeds of the IPO. As of September 30, 2015 and December 31, 2014, the Partnership had $0 and $4.1 million of deferred issuance costs, respectively.

 

Intangible Assets

 

In April 2015, the sponsor contributed net assets to the Partnership associated with the acquisition of Green Circle in January 2015, which included intangible assets related to favorable customer contracts. The Partnership also recorded payments made to acquire a six-year wood pellet off-take contract with a European utility in 2010 as an intangible asset. These costs are recoverable through the future revenue streams generated from the customer contracts and are closely related to the revenue from the customer contracts. These costs are recorded as an asset and charged to expense as the revenue is recognized. All other costs, such as general and administrative expenses and costs associated with the negotiation of a contract that is not consummated, are charged to expense as incurred.

 

Intangible assets are evaluated for impairment when events and changes in circumstances indicate the carrying value may not be recoverable. At September 30, 2015, intangible assets included favorable customer contract and an acquired customer contract, and at December 31, 2014, intangible assets included an acquired customer contract. The customer contract intangible assets are amortized as deliveries are completed during the contract terms (see Note 9, Goodwill and Other Intangible Assets).

 

Goodwill

 

Goodwill represents the purchase price paid for an acquired business in excess of the identifiable acquired assets and assumed liabilities. Goodwill is not amortized, but is tested for impairment annually and whenever an event occurs or circumstances change such that it is more likely than not that the fair value of the reporting unit is less than its carrying amounts. The Partnership has identified one reporting unit which corresponds to the Partnership’s one segment and has selected the fourth fiscal quarter to perform its annual goodwill impairment test.

 

A qualitative assessment is first made to determine whether it is necessary to perform quantitative testing. If this initial qualitative assessment indicates that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and the Partnership is not required to perform the two-step impairment test. Qualitative factors considered in this assessment include (i) macroeconomic conditions, (ii) past, current and projected future financial performance, (iii) industry and market considerations, (iv) changes in the costs of raw materials, fuel and labor and (v) entity-specific factors such as changes in management or customer base.

 

If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, the Partnership will perform a two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

 

If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

For the years ended December 31, 2014 and 2013, the Predecessor applied the qualitative test and determined that it was more likely than not that the estimated fair value of the reporting unit substantially exceeded the related carrying value, and, accordingly, was not required to apply the two-step impairment test. The Predecessor has not recorded any goodwill impairment for the years ended December 31, 2014 and 2013 (see Note 9, Goodwill and Other Intangible Assets).

 

Unit-Based Compensation

 

Employees, consultants and directors of the General Partner and any of its affiliates are eligible to receive awards under the Enviva Partners, LP Long-Term Incentive Plan. For accounting purposes, units granted to employees of the Partnership’s affiliates are treated as if they are distributed by the Partnership. In May, June and July 2015, phantom units in tandem with corresponding distribution equivalent rights were granted to employees of Enviva Management Company, LLC who provide services to the Partnership and to certain non-employee directors of the General Partner. These awards vest subject to the satisfaction of service requirements or the achievement of certain performance goals, following which common units in the Partnership will be delivered to the holder of the phantom units. Affiliate entities recognize compensation expense for the phantom units awarded to their employees and a portion of that expense is allocated to the Partnership (see Note 13, Equity-Based Awards). The Partnership’s outstanding unit-based awards do not have a cash option and are classified as equity on the Partnership’s condensed consolidated balance sheets. The Partnership also recognizes compensation expense for units awarded to non-employee directors.

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as property, plant and equipment and amortizable intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require that a long-lived asset or asset group be tested for possible impairment, the Partnership first compares undiscounted cash flows expected to be generated by that asset or asset group to such asset or asset group’s carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Fair Value Measurements

 

The Partnership applies authoritative accounting guidance for fair value measurements of financial and nonfinancial assets and liabilities. The Partnership uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Partnership determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

·                                          Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

·                                          Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

·                                          Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

Recent and Pending Accounting Pronouncements

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, to amend the guidance for amounts that are adjusted in a merger or acquisition. The standard eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement period adjustments that occur in periods after a business combination is consummated. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Partnership is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in, first-out method of valuing inventory. ASU No. 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years and early adoption is permitted. The Partnership is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-06, Earnings Per Share (Topic 260)—Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions—a consensus of the FASB Emerging Issues Task Force (EITF). The amendments in ASU No. 2015-06 apply to master limited partnerships subject to the Master Limited Partnerships Subsections of Topic 260 that receive net assets through a dropdown transaction that is accounted for under the Transactions Between Entities Under Common Control Subsections of Subtopic 805-50, Business Combinations—Related Issues. When a general partner transfers, or “drops down,” net assets to a master limited partnership and that transaction is accounted for as a transaction between entities under common control, the statements of operations of the master limited partnership are adjusted retrospectively to reflect the dropdown transaction as if it occurred on the earliest date during which the entities were under common control. The amendments in ASU No. 2015-06 specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The amendments in ASU No. 2015-06 are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The amendments in ASU No. 2015-06 should be applied retrospectively for all financial statements presented. The Partnership is evaluating the new pronouncement to determine the impact it may have on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires the presentation of debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. The amortization of such costs will continue to be reported as interest expense. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and allows early adoption for financial statements that have not been previously issued. The update requires retrospective application upon adoption. Upon adoption, the Partnership expects to reclassify amounts included as debt issuance costs within total assets on the consolidated balance sheet to a reduction of long-term debt within total liabilities on the consolidated balance sheet for all periods presented. The adoption is not expected to have an impact on the periodic amount amortized.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new standard reduces the number of consolidation models and simplifies their application. The amendments in ASU No. 2015-02 are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships and similar legal entities. The amendments simplify the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) eliminate the presumption that a general partner should consolidate a limited partnership, (2) eliminate the indefinite deferral of FASB Statement No. 167, thereby reducing the number of variable interest entity (“VIE”) consolidation models from four to two (including the limited partnership consolidation model), (3) clarify when fees paid to a decision maker should be a factor to include in the consolidation of VIEs, (4) amend the guidance for assessing how related party relationships affect VIE consolidation analysis and (5) exclude certain money market funds from the consolidation guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The standard allows early adoption, including early adoption in an interim period. The Partnership is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

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Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items. The new standard eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU No. 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. The standard is effective for periods beginning after December 15, 2015 and early adoption is permitted. The adoption is not expected to have a material effect on the Partnership’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new standard provides new guidance on the recognition of revenue and states that an entity should recognize revenue when control of the goods or services transfers to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The new standard also requires significantly expanded disclosure regarding qualitative and quantitative information about the nature, timing and uncertainty of revenue and cash flow arising from contracts with customers. On July 9, 2015, the FASB approved a one-year delay in the effective date of ASU No. 2014-09. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard permits the use of either applying retrospectively the amendment to each prior reporting period presented or retrospectively with the cumulative effect of initially applying at the date of initial application. The Partnership is in the process of evaluating the impact of adoption on its consolidated financial statements and has not determined which implementation method will be adopted.

 

(4)   Significant Risks and Uncertainties Including Business and Credit Concentrations

 

The Partnership’s business is significantly impacted by greenhouse gas emission and renewable energy legislation and regulations in the European Union (the “E.U.”). If the E.U. significantly modifies such legislation and regulations, the Partnership’s ability to enter into new contracts as the current contracts expire may be materially affected.

 

The Partnership’s primary industrial customers are located in Northern Europe. Three customers accounted for 92% of the Partnership’s product sales during the three months ended September 30, 2015 and 94% during the nine months ended September 30, 2015. Three customers accounted for 100% of the Partnership’s product sales during the three months ended September 30, 2014 and 99% during the nine months ended September 30, 2014.

 

The Partnership’s cash and cash equivalents are placed in or with various financial institutions. The Partnership has not experienced any losses on such accounts and does not believe it has any significant risk in this area.

 

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Table of Contents

 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

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

(Unaudited)

 

(5)         Property, Plant and Equipment

 

Property, plant and equipment consisted of the following at:

 

		September 30, 2015			December 31, 2014
					(Predecessor)
Land		$	12,429		$	11,984
Land improvements		29,600			24,899
Buildings		59,686			57,275
Machinery and equipment		263,756			259,186
Vehicles		505			768
Furniture and office equipment		1,711			1,736
		367,687			355,848
Less accumulated depreciation		(49,103		)	(40,858		)
		318,584			314,990
Construction in progress		3,055			1,269
Total property, plant and equipment, net		$	321,639		$	316,259

 

Total depreciation expense was $4.7 million and $15.7 million for the three and nine months ended September 30, 2015, respectively, and $4.7 million and $14.1 million for the three and nine months ended September 30, 2014, respectively.

 

(6)         Inventories

 

Inventories consisted of the following at:

 

		September 30, 2015			December 31, 2014
					(Predecessor)
Raw materials and work-in-process		$	5,910		$	6,880
Consumable tooling		7,559			6,934
Finished goods		11,897			4,250
Total inventories		$	25,366		$	18,064

 

(7)         Derivative Instruments

 

The Partnership has used interest rate swaps that meet the definition of a derivative instrument to manage changes in interest rates on its variable-rate debt instruments.

 

The Prior Credit Agreement required the Predecessor to swap a minimum of 50% of the term loan balance outstanding under the Prior Senior Secured Credit Facilities. In connection with the issuance of the Prior Senior Secured Credit Facilities (see Note 10, Long-Term Debt and Capital Lease Obligations), the Predecessor entered into floating-to-fixed interest rate swaps (the Partnership received a floating market rate and paid a fixed interest rate) to manage the interest rate exposure related to the Prior Senior Secured Credit Facilities. All indebtedness outstanding under the Prior Senior Secured Credit Facilities was repaid in full on April 9, 2015, and the related interest rate swaps were terminated.

 

For the three and nine months ended September 30, 2015, the Partnership recorded $0 and an insignificant amount as interest expense related to the change in fair value of the interest rate swaps. The Partnership recorded insignificant amounts related to the change in the fair value of the interest rate swap agreements for the three and nine months ended September 30, 2014 as interest expense.

 

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