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Enviva Inc. - Quarter Report: 2018 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from                to                

Commission file number: 001-37363

Enviva Partners, LP

(Exact name of registrant as specified in its charter)

Delaware

46-4097730

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

7200 Wisconsin Ave, Suite 1000

 

Bethesda, MD

20814

(Address of principal executive offices)

(Zip code)

 

 

(301) 657-5560

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

 

Emerging growth company  ☒

 

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

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

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

 

 


 

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ENVIVA PARTNERS, LP

QUARTERLY REPORT ON FORM 10‑Q

TABLE OF CONTENTS

 

Page

CAUTIONARY STATEMENT REGARDING FORWARD‑LOOKING STATEMENTS 

1

GLOSSARY OF TERMS 

3

PART I—FINANCIAL INFORMATION 

4

Item 1. 

Financial Statements (unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statement of Changes in Partners’ Capital

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

10

Item 2. 

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

50

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

66

Item 4. 

Controls and Procedures

67

PART II—OTHER INFORMATION 

68

Item 1. 

Legal Proceedings

68

Item 1A. 

Risk Factors

68

Item 6. 

Exhibits

69

 

 

 

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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. Although management believes that these forward‑looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward‑looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward‑looking statements include, but are not limited to, those summarized below:

·

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

·

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

·

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

·

the creditworthiness of our contract counterparties;

·

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

·

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

·

changes in prevailing economic conditions;

·

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

·

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

·

fires, explosions or other accidents;

·

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

·

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

·

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

·

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

·

changes in the price and availability of transportation;

·

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

·

risks related to our indebtedness;

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Table of Contents

·

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

·

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

·

labor disputes;

·

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

·

our ability to borrow funds and access capital markets.

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

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

 

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GLOSSARY OF TERMS

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

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

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

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

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

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

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

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

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

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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except number of units)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31, 

    

 

    

2018

    

2017

    

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

863

 

$

524

 

Accounts receivable, net

 

 

49,152

 

 

79,185

 

Related-party receivables

 

 

5,535

 

 

5,412

 

Inventories

 

 

34,322

 

 

23,536

 

Prepaid expenses and other current assets

 

 

1,643

 

 

1,006

 

Total current assets

 

 

91,515

 

 

109,663

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

552,456

 

 

562,330

 

Intangible assets, net

 

 

 —

 

 

109

 

Goodwill

 

 

85,615

 

 

85,615

 

Other long-term assets

 

 

4,783

 

 

2,394

 

Total assets

 

$

734,369

 

$

760,111

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,730

 

$

7,554

 

Related-party payables and accrued liabilities

 

 

30,289

 

 

26,398

 

Accrued and other current liabilities

 

 

35,849

 

 

29,363

 

Current portion of interest payable

 

 

12,573

 

 

5,029

 

Current portion of long-term debt and capital lease obligations

 

 

7,070

 

 

6,186

 

Total current liabilities

 

 

96,511

 

 

74,530

 

Long-term debt and capital lease obligations

 

 

402,447

 

 

394,831

 

Related-party long-term payable

 

 

74,000

 

 

74,000

 

Long-term interest payable

 

 

980

 

 

890

 

Other long-term liabilities

 

 

4,687

 

 

5,491

 

Total liabilities

 

 

578,625

 

 

549,742

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

Limited partners:

 

 

 

 

 

 

 

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

 

 

212,539

 

 

224,027

 

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

 

 

76,380

 

 

16,050

 

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

 

 

 —

 

 

101,901

 

General partner (no outstanding units)

 

 

(133,810)

 

 

(128,569)

 

Accumulated other comprehensive income (loss)

 

 

635

 

 

(3,040)

 

Total Enviva Partners, LP partners’ capital

 

 

155,744

 

 

210,369

 

Total liabilities and partners’ capital

 

$

734,369

 

$

760,111

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017 (Recast)

    

2018

    

2017 (Recast)

 

Product sales

 

$

142,541

 

$

125,422

 

$

398,031

 

$

366,142

 

Other revenue (1)

 

 

1,607

 

 

6,801

 

 

7,037

 

 

16,071

 

Net revenue

 

 

144,148

 

 

132,223

 

 

405,068

 

 

382,213

 

Cost of goods sold (1)

 

 

103,695

 

 

100,897

 

 

330,456

 

 

296,786

 

Loss on disposal of assets

 

 

656

 

 

1,237

 

 

900

 

 

3,242

 

Depreciation and amortization

 

 

9,678

 

 

9,707

 

 

28,800

 

 

29,104

 

Total cost of goods sold

 

 

114,029

 

 

111,841

 

 

360,156

 

 

329,132

 

Gross margin

 

 

30,119

 

 

20,382

 

 

44,912

 

 

53,081

 

General and administrative expenses (1)

 

 

7,315

 

 

7,704

 

 

21,406

 

 

23,337

 

Income from operations

 

 

22,804

 

 

12,678

 

 

23,506

 

 

29,744

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,445)

 

 

(7,653)

 

 

(27,137)

 

 

(23,070)

 

Other income (expense)

 

 

(3)

 

 

(2)

 

 

1,196

 

 

(199)

 

Total other expense, net

 

 

(9,448)

 

 

(7,655)

 

 

(25,941)

 

 

(23,269)

 

Net income (loss)

 

 

13,356

 

 

5,023

 

 

(2,435)

 

 

6,475

 

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

665

 

 

 —

 

 

3,180

 

Net income (loss) attributable to Enviva Partners, LP

 

$

13,356

 

$

5,688

 

$

(2,435)

 

$

9,655

 

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

 

 

 —

 

 

(651)

 

 

 —

 

 

(3,081)

 

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

 

$

13,356

 

$

6,339

 

$

(2,435)

 

$

12,736

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Diluted

 

$

0.43

 

$

0.19

 

$

(0.25)

 

$

0.37

 

Net income (loss) per limited partner subordinated unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 —

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Diluted

 

$

 —

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Weighted-average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common—basic

 

 

26,477

 

 

14,412

 

 

19,866

 

 

14,400

 

Common—diluted

 

 

27,478

 

 

15,385

 

 

19,866

 

 

15,343

 

Subordinated—basic and diluted

 

 

 —

 

 

11,905

 

 

6,541

 

 

11,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 12, Related-Party Transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income 

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30,

 

September 30,

    

 

 

2018

    

2017 (Recast)

    

2018

    

2017 (Recast)

 

Net income (loss)

    

$

13,356

    

$

5,023

 

$

(2,435)

 

$

6,475

 

Other comprehensive income (loss):

 

 

 

 

 

  

 

 

 

 

 

  

 

Net unrealized gains (losses) on cash flow hedges

 

 

2,713

 

 

(1,788)

 

 

5,750

 

 

(4,641)

 

Reclassification of net gains realized into net income (loss)

 

 

(2,013)

 

 

55

 

 

(2,076)

 

 

161

 

Currency translation adjustment

 

 

 1

 

 

 —

 

 

 1

 

 

 —

 

Total other comprehensive income (loss)

 

 

701

 

 

(1,733)

 

 

3,675

 

 

(4,480)

 

Total comprehensive income

 

 

14,057

 

 

3,290

 

 

1,240

 

 

1,995

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

(651)

 

 

 —

 

 

(3,081)

 

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

 

 

14,057

 

 

3,941

 

 

1,240

 

 

5,076

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

(665)

 

 

 —

 

 

(3,180)

 

Comprehensive income attributable to Enviva Partners, LP partners

 

$

14,057

 

$

4,606

 

$

1,240

 

$

8,256

 

 

See accompanying notes to condensed consolidated financial statements.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners’ Capital

 

 

 

 

 

 

 

 

 

 

 

Common

 

Common

 

Subordinated

 

Accumulated

 

 

 

 

 

General

 

Units—

 

Units—

 

Units—

 

Other

 

Total

 

 

 

Partner

 

Public

 

Sponsor

 

Sponsor

 

Comprehensive

 

Partners'

 

    

    

Interest

    

Units

    

Amount

    

Units

    

Amount

    

Units

    

Amount

    

(Loss) Income

    

Capital

Partners’ capital, December 31, 2017

 

 

 

(128,569)

 

13,073

 

 

224,027

 

1,347

 

 

16,050

 

11,905

 

 

101,901

 

 

(3,040)

 

 

210,369

Distributions to unitholders, distribution equivalent and incentive distribution rights

 

 

 

(3,794)

 

 —

 

 

(28,367)

 

 —

 

 

(8,285)

 

 —

 

 

(14,822)

 

 

 —

 

 

(55,268)

Issuance of units through Long-Term Incentive Plan

 

 

 

(5,675)

 

227

 

 

511

 

(82)

 

 

(1,301)

 

 —

 

 

 —

 

 

 —

 

 

(6,465)

Issuance of common units, net

 

 

 

 —

 

 8

 

 

241

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

241

Sale of common units

 

 

 

 —

 

1,265

 

 

13,335

 

(1,265)

 

 

(13,335)

 

 —

 

 

 —

 

 

 —

 

 

 —

Conversion of subordinated units to common units

 

 

 

 —

 

 —

 

 

 —

 

11,905

 

 

78,504

 

(11,905)

 

 

(78,504)

 

 

 —

 

 

 —

Non-cash Management Services Agreement expenses

 

 

 

434

 

 

 

 

5,193

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,627

Other comprehensive income

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,675

 

 

3,675

Net income (loss)

 

 

 

3,794

 

 —

 

 

(2,401)

 

 —

 

 

4,747

 

 —

 

 

(8,575)

 

 

 —

 

 

(2,435)

Partners’ capital, September 30, 2018

 

 

$

(133,810)

 

14,573

 

$

212,539

 

11,905

 

$

76,380

 

 —

 

$

 —

 

$

635

 

$

155,744

 

See accompanying notes to condensed consolidated financial statements.

 

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

 

2018

    

 

2017 (Recast)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,435)

 

$

6,475

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29,240

 

 

29,115

 

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

 

 

828

 

 

1,161

 

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

 

 

 —

 

 

1,338

 

Loss on disposal of assets

 

 

900

 

 

3,242

 

Unit-based compensation

 

 

5,604

 

 

5,113

 

De-designation of foreign currency forwards and options

 

 

(1,947)

 

 

 —

 

Fair value changes in derivatives

 

 

(4,465)

 

 

(13)

 

Unrealized loss on foreign currency transactions

 

 

32

 

 

 —

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

30,004

 

 

28,026

 

Related-party receivables

 

 

(123)

 

 

(3,312)

 

Prepaid expenses and other assets

 

 

(160)

 

 

76

 

Assets held for sale

 

 

 —

 

 

(310)

 

Inventories

 

 

(9,735)

 

 

(4,433)

 

Other long-term assets

 

 

 —

 

 

86

 

Derivatives

 

 

5,080

 

 

(1,442)

 

Accounts payable, accrued liabilities and other current liabilities

 

 

5,475

 

 

(6,845)

 

Related-party payables and accrued liabilities

 

 

3,317

 

 

8,832

 

Accrued interest

 

 

7,634

 

 

6,301

 

Other current liabilities

 

 

234

 

 

 —

 

Other long-term liabilities

 

 

648

 

 

621

 

Net cash provided by operating activities

 

 

70,131

 

 

74,031

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(16,034)

 

 

(21,916)

 

Insurance proceeds from property loss

 

 

1,130

 

 

 —

 

Net cash used in investing activities

 

 

(14,904)

 

 

(21,916)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on debt and capital lease obligations

 

 

(4,745)

 

 

(3,428)

 

Cash paid related to debt issuance costs

 

 

 —

 

 

(209)

 

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

 

 

241

 

 

1,715

 

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

 

 

(55,163)

 

 

(46,323)

 

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

 

 

(2,341)

 

 

 —

 

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

 

 

(4,380)

 

 

 —

 

Proceeds and payments on revolving credit commitments, net

 

 

11,500

 

 

(6,500)

 

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

 

 

 —

 

 

1,652

 

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

 

 

 —

 

 

9,965

 

Net cash used in financing activities

 

 

(54,888)

 

 

(43,128)

 

Net increase in cash, cash equivalents and restricted cash

 

 

339

 

 

8,987

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

524

 

 

466

 

Cash, cash equivalents and restricted cash, end of period

 

$

863

 

$

9,453

 

 

See accompanying notes to condensed consolidated financial statements.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

 

2018

    

 

2017 (Recast)

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

 

$

7,539

 

$

6,649

 

Property, plant and equipment acquired under capital lease obligations

 

 

949

 

 

1,124

 

Property, plant and equipment transferred from inventories

 

 

 2

 

 

279

 

Distributions included in liabilities

 

 

1,047

 

 

937

 

Withholding tax payable associated with Long-Term Incentive Plan vesting

 

 

156

 

 

 —

 

Conversion of subordinated units to common units

 

 

78,504

 

 

 —

 

Application of short-term deposit to fixed assets

 

 

 —

 

 

258

 

Depreciation capitalized to inventories

 

 

1,508

 

 

483

 

Supplemental information:

 

 

 

 

 

 

 

Interest paid

 

$

18,802

 

$

15,516

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

(1)  Description of Business and Basis of Presentation

Description of Business

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

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

Basis of Presentation

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

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

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

Enviva Port of Wilmington, LLC

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

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

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

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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

(2)  Significant Accounting Policies

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

Use of Estimates

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

Revenue Recognition

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

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

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

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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

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

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

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

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

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

Cost of Goods Sold

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

Recently Adopted Accounting Standards

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

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

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

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

    

As Reported

    

Adoption of ASC 606

 

Without Adoption of ASC 606

 

As Reported

    

Adoption of ASC 606

 

Without Adoption of ASC 606

Product sales

 

$

142,541

 

$

(571)

 

$

141,970

 

$

398,031

 

$

(6,178)

 

$

391,853

Other revenue

 

 

1,607

 

 

351

 

 

1,958

 

 

7,037

 

 

337

 

 

7,374

Cost of goods sold

 

 

114,029

 

 

(220)

 

 

113,809

 

 

360,156

 

 

(5,841)

 

 

354,315

Gross margin

 

$

30,119

 

$

 —

 

$

30,119

 

$

44,912

 

$

 —

 

$

44,912

 

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

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

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

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Recently Issued Accounting Standards not yet Adopted

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

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

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

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

·

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

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

·

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

·

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

 

(3) Revenue

Performance Obligations

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Period from October 1, 2018 to December 31, 2018

 

2019

 

Thereafter

 

Total

Product sales

 

$

165,859

 

$

651,725

 

$

6,505,876

 

$

7,323,460

Other revenue

 

 

177

 

 

708

 

 

1,180

 

 

2,065

Total revenue

 

$

166,036

 

$

652,433

 

$

6,507,056

 

$

7,325,525

 

Variable Consideration

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

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

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

Contract Balances

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

(4)  Transactions Between Entities Under Common Control

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

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

    

As

    

Enviva Port of

    

 

    

 

 

Reported

 

Wilmington, LLC

 

Total (Recast)

 

Cash and cash equivalents

 

$

9,453

 

$

 —

 

$

9,453

 

Accounts receivable, net

 

 

49,855

 

 

 —

 

 

49,855

 

Related-party receivables

 

 

7,748

 

 

968

 

 

8,716

 

Inventories

 

 

34,477

 

 

96

 

 

34,573

 

Prepaid expenses and other current assets

 

 

4,540

 

 

42

 

 

4,582

 

Total current assets

 

 

106,073

 

 

1,106

 

 

107,179

 

Property, plant and equipment, net of accumulated depreciation

 

 

495,366

 

 

75,485

 

 

570,851

 

Goodwill

 

 

85,615

 

 

 —

 

 

85,615

 

Other long-term assets

 

 

2,180

 

 

52

 

 

2,232

 

Total assets

 

$

689,234

 

$

76,643

 

$

765,877

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,122

 

$

188

 

$

3,310

 

Related-party payables

 

 

19,948

 

 

(615)

 

 

19,333

 

Accrued and other current liabilities

 

 

46,715

 

 

2,834

 

 

49,549

 

Total current liabilities

 

 

69,785

 

 

2,407

 

 

72,192

 

Long-term debt and capital lease obligations

 

 

338,115

 

 

187

 

 

338,302

 

Other long-term liabilities

 

 

4,134

 

 

1,622

 

 

5,756

 

Total liabilities

 

 

412,034

 

 

4,216

 

 

416,250

 

Total partners’ capital

 

 

277,200

 

 

72,427

 

 

349,627

 

Total liabilities and partners’ capital

 

$

689,234

 

$

76,643

 

$

765,877

 

 

The following table presents the changes to previously reported amounts in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017 included in our quarterly report on Form 10-Q for the quarter ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

 

    

As

    

Enviva Port of

    

Total

    

 

 

Reported

 

Wilmington

 

(Recast)

 

Net revenue

 

$

131,458

 

$

765

 

$

132,223

 

Total cost of goods sold

 

 

110,340

 

 

1,501

 

 

111,841

 

Gross margin

 

 

21,118

 

 

(736)

 

 

20,382

 

Net income (loss)

 

 

6,334

 

 

(1,311)

 

 

5,023

 

Less net loss attributable to noncontrolling partners’ interests

 

 

 5

 

 

660

 

 

665

 

Net income (loss) attributable to Enviva Partners, LP

 

 

6,339

 

 

(651)

 

 

5,688

 

Net loss attributable to general partner

 

 

 —

 

 

(651)

 

 

(651)

 

Net income attributable to Enviva Partners, LP limited partners’ interest in net income

 

 

6,339

 

 

 —

 

 

6,339

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

    

As

    

Enviva Port of

    

Total

    

 

    

Reported

 

Wilmington

 

(Recast)

    

Net revenue

 

$

380,529

 

$

1,684

 

$

382,213

 

Total cost of goods sold

 

 

322,748

 

 

6,384

 

 

329,132

 

Gross margin

 

 

57,781

 

 

(4,700)

 

 

53,081

 

Net income (loss)

 

 

12,695

 

 

(6,220)

 

 

6,475

 

Less net income attributable to noncontrolling partners’ interests

 

 

41

 

 

3,139

 

 

3,180

 

Net income (loss) attributable to Enviva Partners, LP

 

 

12,736

 

 

(3,081)

 

 

9,655

 

Net loss attributable to general partner

 

 

 —

 

 

(3,081)

 

 

(3,081)

 

Net income attributable to Enviva Partners, LP limited partners’ interest in net income

 

 

12,736

 

 

 —

 

 

12,736

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

    

As

    

Enviva Port of

    

Total

    

 

    

Reported

 

Wilmington

 

(Recast)

    

Net cash provided by (used in) operating activities

 

$

76,327

 

$

(2,296)

 

$

74,031

 

Net cash used in investing activities

 

 

(14,289)

 

 

(7,627)

 

 

(21,916)

 

Net cash (used in) provided by financing activities

 

 

(53,051)

 

 

9,923

 

 

(43,128)

 

Net increase in cash, cash equivalents and restricted cash

 

$

8,987

 

$

 —

 

$

8,987

 

 

 

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

Our business is significantly impacted by greenhouse gas emission and renewable energy legislation and regulations in the European Union as well as its member states. If the European Union or its member states significantly modify such legislation or regulations, then our ability to enter into new contracts as the current contracts expire may be materially affected.

Our current sales are primarily to industrial customers located in the United Kingdom, Denmark and Belgium. Product sales to third-party customers that accounted for 10% or a greater share of consolidated product sales are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

    

 

 

September 30,

 

 

September 30,

 

    

 

 

2018

 

2017 (Recast)

    

2018

 

2017 (Recast)

 

Customer A

 

52

%  

73

%  

 

53

%  

68

%

 

Customer B

 

10

%  

14

%  

 

10

%  

15

%

 

Customer C

 

24

%  

 4

%  

 

15

%  

 1

%

 

Customer D

 

 9

%  

 9

%  

 

14

%  

12

%

 

 

 

(6) Inventory Impairment and Asset Disposal

On February 27, 2018, a fire occurred at the Chesapeake terminal, causing damage to equipment and approximately 43,000 MT of wood pellets (the “Chesapeake Incident”). As part of our risk management process, we maintain certain insurance policies, which are subject to deductibles and sublimits for each covered event. When recovery of all or a

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

portion of property damage loss or other covered expenses through insurance proceeds is probable, a receivable is recorded and the loss or expense is reduced up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved. Income resulting from business interruption insurance is not recognized until all contingencies related to the insurance recoveries are resolved. We believe that substantially all of the costs resulting from the Chesapeake Incident are recoverable through our insurance policies and other contractual rights.

Following the Chesapeake Incident, we commissioned temporary storage, handling and shiploading operations at various locations, including a nearby terminal in Norfolk, Virginia, and began utilizing our Wilmington terminal to ship product from our wood pellet production plants in the Mid-Atlantic region (collectively, “business continuity activities”). Although the Chesapeake terminal returned to operation on June 28, 2018, costs associated with business continuity activities continued through the third quarter of 2018 as we unwound our extended logistics chain.

We recorded impairment of terminal assets of $0 and $1.1 million during the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2018, write-off of product, inclusive of disposal costs, was $0 and $10.7 million, respectively, which is included in cost of goods sold. Additional costs primarily related to emergency response, asset repairs and business continuity activities of $9.7 million and $46.6 million were incurred during the three and nine months ended September 30, 2018, respectively, and are included in cost of goods sold.

As of September 30, 2018, we have received $47.5 million of insurance proceeds and have recorded $1.7 million of additional insurance recoveries in accounts receivable reflecting the insurance proceeds that are probable of receipt up to the amount of the loss recorded, in connection with the Chesapeake Incident. We subsequently received the $1.7 million of insurance recoveries in October 2018. We recorded $21.8 million and $48.1 million of insurance recoveries in cost of goods sold during the three and nine months ended September 30, 2018, respectively. Of the $21.8 million and $48.1 million of insurance recoveries recorded during the three and nine months ended September 30, 2018, respectively, $11.4 million and $24.4 million, respectively, was related to business continuity activities. During the three and nine months ended September 30, 2018, we received and recognized $0 and $1.1 million, respectively, of insurance recoveries in other income related to lost profit.

(7)  Inventories

Inventories consisted of the following at:

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31, 

    

 

    

2018

    

2017

    

Raw materials and work-in-process

 

$

3,896

 

$

4,516

 

Consumable tooling

 

 

16,304

 

 

14,447

 

Finished goods

 

 

14,122

 

 

4,573

 

Total inventories

 

$

34,322

 

$

23,536

 

 

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(8)  Property, Plant and Equipment

Property, plant and equipment consisted of the following at:

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31, 

    

 

    

2018

    

2017

    

Land

 

$

13,492

 

$

13,492

 

Land improvements

 

 

44,675

 

 

42,962

 

Buildings

 

 

196,696

 

 

196,153

 

Machinery and equipment

 

 

419,181

 

 

413,349

 

Vehicles

 

 

635

 

 

635

 

Furniture and office equipment

 

 

6,083

 

 

5,970

 

Leasehold improvements

 

 

987

 

 

987

 

 

 

 

681,749

 

 

673,548

 

Less accumulated depreciation

 

 

(145,297)

 

 

(117,067)

 

 

 

 

536,452

 

 

556,481

 

Construction in progress

 

 

16,004

 

 

5,849

 

Total property, plant and equipment, net

 

$

552,456

 

$

562,330

 

 

Total depreciation expense was $9.8 million and $29.1 million and $9.0 million and $27.9 million for the three and nine months ended September 30, 2018 and 2017, respectively. Accrued amounts for property, plant and equipment and construction in progress included in accrued liabilities and other current liabilities were $5.7 million and $2.3 million at September 30, 2018 and December 31, 2017, respectively.

 

 

(9)  Derivative Instruments

We use derivative instruments to partially offset our business exposure to foreign currency exchange and interest rate risk. We may enter into foreign currency forward and option contracts to offset some of the foreign currency exchange risk on our expected future cash flows and interest rate swaps to offset some of the interest rate risk on our expected future cash flows on certain borrowings. Our derivative instruments expose us to credit risk to the extent that our hedge counterparties may be unable to meet the terms of the applicable derivative instrument. We seek to mitigate such risks by limiting our counterparties to major financial institutions. In addition, we monitor the potential risk of loss with any one counterparty resulting from credit risk. Management does not expect material losses as a result of defaults by counterparties. We use derivative instruments to manage cash flow and not for speculative or trading purposes.

Cash Flow Hedges

Foreign Currency Exchange Risk

We are primarily exposed to fluctuations in foreign currency exchange rates related to off-take contracts that require future deliveries of wood pellets to be settled in British Pound Sterling (“GBP”) and Euro (“EUR”). We have entered and may continue to enter into foreign currency forward contracts, purchased option contracts or other instruments to partially manage this risk and, prior to August 2018, have designated certain of these instruments as cash flow hedges.

For qualifying cash flow hedges, the effective portion of the gain or loss on the change in fair value is initially reported as a component of accumulated other comprehensive income in partners’ capital and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss, if any, is reported in

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

earnings in the current period. We considered our cash flow hedges to be highly effective at inception. Changes in fair value for derivative instruments not designated as hedging instruments are recognized in earnings.

During August 2018, we elected to discontinue hedge accounting for all designated foreign currency cash flow hedges. As of the election date, the change in fair value of the cash flow hedges was recognized in accumulated other comprehensive income. Due to recent increases in demand for wood pellets and requests from customers to accommodate the acceleration or deferral of contracted deliveries, we have determined that it is not probable that the timing of the forecasted revenues associated with the hedged transactions will occur as originally scheduled. As a result, we reclassified the full amount of unrealized net gains included in accumulated other comprehensive income of $1.9 million to earnings. As of September 30, 2018, none of our foreign currency derivative instruments were designated as cash flow hedging instruments. In connection with the discontinuation of cash flow hedge accounting, we have recorded the changes in the fair value of foreign currency hedges as product sales.

During the three and nine months ended September 30, 2018, we recorded $2.3 million and $5.4 million, respectively, of unrealized net gains on derivative instruments in product sales. Included in the unrealized net gains for both the three and nine months ended September 30, 2018 was $1.9 million related to the reclassification of unrealized net gains previously included in accumulated other comprehensive income as described above. During the three months ended September 30, 2018, we received $4.3 million on realized gains related to derivatives settled during the period. We do not intend to designate future foreign currency hedges as cash flow hedges; as a result, all future changes in the fair value of hedging instruments will be recognized in product sales.

Interest Rate Risk

We are exposed to fluctuations in interest rates on borrowings under our senior secured credit facilities. We entered into a pay-fixed, receive-variable interest rate swap to hedge the interest rate risk associated with our variable rate borrowings under our senior secured credit facilities. Our interest rate swap expires in April 2020.

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The fair values of cash flow hedging instruments as of September 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset

 

Liability

 

    

Balance Sheet Location

    

Derivatives

    

Derivatives

Derivatives designated as hedging instruments:

    

 

 

 

 

 

 

 

Forward contracts:

 

 

 

 

 

 

 

 

Interest rate swap

 

Other current assets

 

$

532

 

$

 —

Interest rate swap

 

Other long-term assets

 

 

314

 

 

 —

Total derivatives designated as hedging instruments

 

  

 

$

846

 

$

 —

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

    

 

 

 

 

 

Forward contracts:

 

 

 

 

 

 

 

 

Foreign currency exchange forward contracts

 

Prepaid and other current assets

 

$

255

 

$

 —

Foreign currency exchange forward contracts

 

Other long-term assets

 

 

1,030

 

 

 

Foreign currency exchange forward contracts

 

Accrued and other current liabilities

 

 

 —

 

 

263

Foreign currency exchange forward contracts

 

Other long-term liabilities

 

 

 —

 

 

902

Purchased options:

 

 

 

 

 

 

 

 

Foreign currency purchased option contracts

 

Other long-term assets

 

 

2,410

 

 

 —

Total derivatives not designated as hedging instruments

 

  

 

$

3,695

 

$

1,165

 

 

 

 

 

 

 

 

 

Net gains included in product sales related to the change of fair market value of derivative instruments not designated as hedging instruments during the three and nine months ended September 30, 2018 were $0.4 million and $3.5 million, respectively.

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The fair values of cash flow hedging instruments as of December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset

 

Liability

 

    

Balance Sheet Location

    

Derivatives

    

Derivatives

Derivatives designated as hedging instruments:

    

 

 

 

 

 

 

 

Forward contracts:

 

 

 

 

 

 

 

 

Foreign currency exchange forward contracts

 

Other long-term liabilities

 

$

 —

 

$

2,118

Purchased options:

 

 

 

 

 

 

 

 

Foreign currency purchased option contracts

 

Prepaid and other current assets

 

 

1,024

 

 

 —

Interest rate swap:

 

 

 

 

 

 

 

 

Interest rate swap

 

Prepaid and other current assets

 

 

220

 

 

 —

Interest rate swap

 

Other long-term assets

 

 

407

 

 

 —

Total derivatives designated as hedging instruments

 

  

 

$

1,651

 

$

2,118

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

    

 

 

 

 

 

Forward contracts:

 

 

 

 

 

 

 

 

Foreign currency exchange forward contracts

 

Prepaid and other current assets

 

$

124

 

$

 —

Foreign currency exchange forward contracts

 

Accrued and other current liabilities

 

 

 —

 

 

806

Foreign currency exchange forward contracts

 

Other long-term liabilities

 

 

 —

 

 

528

Purchased options:

 

 

 

 

 

 

 

 

Foreign currency purchased option contracts

 

Prepaid and other current assets

 

 

 3

 

 

 —

Foreign currency purchased option contracts

 

Other long-term assets

 

 

45

 

 

 —

Total derivatives not designated as hedging instruments

 

  

 

$

172

 

$

1,334

 

Net gains included in other income (expense) related to the change of fair market value of derivative instruments not designated as hedging instruments were $0.1 million and $0.3 million, respectively, during the three and nine months ended September 30, 2017.

The effects of instruments that were designated as cash flow hedges and the related changes in accumulated other comprehensive loss and the gains and losses recognized in earnings for the three months ended September 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Amount of

    

 

    

 

 

 

 

 

 

Location of

 

Gain (Loss)

 

Location of Gain

 

Amount of Gain

 

 

Amount of Gain

 

Gain (Loss)

 

Reclassified from

 

(Loss) Recognized in

 

(Loss) Recognized in

 

 

(Loss) in Other

 

Reclassified from

 

Accumulated Other

 

Earnings on Derivative

 

Earnings on Derivative

 

 

Comprehensive

 

Accumulated Other

 

Comprehensive

 

(Ineffective Portion

 

(Ineffective Portion

 

 

(Loss) income on

 

Comprehensive

 

(Loss) Income

 

and Amount

 

and Amount

 

 

Derivative

 

(Loss) Income

 

into Earnings

 

Excluded from

 

Excluded from

 

    

(Effective Portion)

    

(Effective Portion)

    

(Effective Portion)

    

Effectiveness Testing)

    

Effectiveness Testing)

Foreign currency exchange forward contracts

 

$

1,907

 

Product sales

 

$

 —

 

Product sales

 

$

2,418

Foreign currency exchange purchased option contracts

 

 

765

 

Product sales

 

 

 —

 

Product sales

 

 

(470)

Interest rate swap

 

 

41

 

Other income (expense)

 

 

 —

 

Other income (expense)

 

 

67

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The effects of instruments that were designated as cash flow hedges and the related changes in accumulated other comprehensive loss and the gains and losses recognized in earnings for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Amount of

    

 

    

 

 

 

 

 

 

Location of

 

Gain (Loss)

 

Location of Gain

 

Amount of Gain

 

 

Amount of Gain

 

Gain (Loss)

 

Reclassified from

 

(Loss) Recognized in

 

(Loss) Recognized in

 

 

(Loss) in Other

 

Reclassified from

 

Accumulated Other

 

Earnings on Derivative

 

Earnings on Derivative

 

 

Comprehensive

 

Accumulated Other

 

Comprehensive

 

(Ineffective Portion

 

(Ineffective Portion

 

 

(Loss) income on

 

Comprehensive

 

(Loss) Income

 

and Amount

 

and Amount

 

 

Derivative

 

(Loss) Income

 

into Earnings

 

Excluded from

 

Excluded from

 

    

(Effective Portion)

    

(Effective Portion)

    

(Effective Portion)

    

Effectiveness Testing)

    

Effectiveness Testing)

Foreign currency exchange forward contracts

 

$

4,532

 

Product sales

 

$

 —

 

Product sales

 

$

2,413

Foreign currency exchange purchased option contracts

 

 

749

 

Product sales

 

 

 —

 

Product sales

 

 

(470)

Interest rate swap

 

 

469

 

Other income (expense)

 

 

 —

 

Other income (expense)

 

 

131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The effects of instruments that were designated as cash flow hedges and the related changes in accumulated other comprehensive loss and the gains and losses recognized in earnings for the three months ended September 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Amount of

    

 

    

 

 

 

 

 

 

Location of

 

Gain (Loss)

 

Location of Gain

 

Location of Gain

 

 

Amount of Gain

 

Gain (Loss)

 

Reclassified from

 

(Loss) Recognized in

 

(Loss) Recognized in

 

 

(Loss) in Other

 

Reclassified from

 

Accumulated Other

 

Income on Derivative

 

Income on Derivative

 

 

Comprehensive

 

Accumulated Other

 

Comprehensive

 

(Ineffective Portion

 

(Ineffective Portion

 

 

Income on

 

Comprehensive

 

Income

 

and Amount

 

and Amount

 

 

Derivative

 

Income

 

into Income

 

Excluded from

 

Excluded from

 

    

(Effective Portion)

    

(Effective Portion)

    

(Effective Portion)

    

Effectiveness Testing)

    

Effectiveness Testing)

Foreign currency exchange forward contracts

 

$

(1,484)

 

Product sales

 

$

26

 

Product sales

 

$

(1)

Foreign currency exchange forward contracts

 

 

(22)

 

Other revenue

 

 

(30)

 

Other revenue

 

 

 —

Foreign currency exchange purchased option contracts

 

 

(294)

 

Product sales

 

 

 —

 

Product sales

 

 

 —

Interest rate swap

 

 

12

 

Other income (expense)

 

 

(51)

 

Other income (expense)

 

 

13

 

The effects of instruments that were designated as cash flow hedges and the related changes in accumulated other comprehensive loss and the gains and losses recognized in earnings for the nine months ended September 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Amount of

    

 

    

 

 

 

 

 

 

Location of

 

Gain (Loss)

 

Location of Gain

 

Location of Gain

 

 

Amount of Gain

 

Gain (Loss)

 

Reclassified from

 

(Loss) Recognized in

 

(Loss) Recognized in

 

 

(Loss) in Other

 

Reclassified from

 

Accumulated Other

 

Earnings on Derivative

 

Earnings on Derivative

 

 

Comprehensive

 

Accumulated Other

 

Comprehensive

 

(Ineffective Portion

 

(Ineffective Portion

 

 

Income on

 

Comprehensive

 

Income

 

and Amount

 

and Amount

 

 

Derivative

 

Income

 

into Earnings

 

Excluded from

 

Excluded from

 

    

(Effective Portion)

    

(Effective Portion)

    

(Effective Portion)

    

Effectiveness Testing)

    

Effectiveness Testing)

Foreign currency exchange forward contracts

 

$

(3,445)

 

Product sales

 

$

26

 

Product sales

 

$

(1)

Foreign currency exchange forward contracts

 

 

(11)

 

Other revenue

 

 

(11)

 

Other revenue

 

 

 —

Foreign currency exchange purchased option contracts

 

 

(1,047)

 

Product sales

 

 

 —

 

Product sales

 

 

 —

Interest rate swap

 

 

(138)

 

Other income (expense)

 

 

(176)

 

Other income (expense)

 

 

13

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

We enter into master netting arrangements, which are designed to permit net settlement of derivative transactions among the respective counterparties. If we had settled all transactions with our respective counterparties at September 30, 2018, we would have received a net settlement termination payment of $3.4 million, which differs insignificantly from the recorded fair value of the derivatives. We present our derivative assets and liabilities at their gross fair values.

The notional amounts of outstanding derivative instruments associated with outstanding or unsettled derivative instruments were as follows:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31, 

 

 

2018

 

2017

Foreign exchange forward contracts in GBP

    

£

45,630

 

£

46,465

Foreign exchange purchased option contracts in GBP

 

£

39,365

 

£

34,050

Foreign exchange forward contracts in EUR

 

14,300

 

5,350

Foreign exchange purchased option contracts in EUR

 

1,675

 

 —

Interest rate swap

 

$

41,198

 

$

44,756

 

 

 

 

(10)  Fair Value Measurements

The amounts reported in the unaudited condensed consolidated balance sheets as cash and cash equivalents, accounts receivable, related-party receivables, prepaid expenses and other current assets, accounts payable, related-party payables and accrued liabilities and accrued and other current liabilities approximate fair value because of the short-term nature of these instruments.

Derivative instruments and long-term debt and capital lease obligations, including the current portion, are classified as Level 2 instruments. The fair value of our senior notes (see Note 11, Long-Term Debt and Capital Lease Obligations – Senior Notes Due 2021) was determined based on observable market prices in a less active market and was categorized as Level 2 in the fair value hierarchy. The fair value of other long-term debt and capital lease obligations classified as Level 2 was determined based on market prices not quoted on active markets and other observable market data.

The carrying amount and estimated fair value of long-term debt and capital lease obligations as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

    

Carrying

    

Fair

    

Carrying

    

Fair

 

    

Amount

    

Value

    

Amount

    

Value

Senior notes

 

$

352,682

 

$

366,420

 

$

352,224

 

$

374,624

Other long-term debt and capital lease obligations

 

 

56,835

 

 

56,835

 

 

48,793

 

 

48,793

Total long-term debt and capital lease obligations

 

$

409,517

 

$

423,255

 

$

401,017

 

$

423,417

 

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(11) Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations at carrying value are composed of the following:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31, 

 

 

    

2018

    

2017

    

Senior notes, net of unamortized discount, premium and debt issuance of $2.3 million as of September 30, 2018 and $2.8 million as of December 31, 2017

 

$

352,682

 

$

352,224

 

Senior secured credit facilities, Tranche A-1 Advances, net of unamortized discount and debt issuance costs of $0.7 million as of September 30, 2018 and $1.0 million as of December 31, 2017

 

 

36,365

 

 

39,263

 

Senior secured credit facilities, Tranche A-3 Advances, net of unamortized discount and debt issuance costs of $0.1 million as of September 30, 2018 and December 31, 2017

 

 

4,081

 

 

4,372

 

Senior secured credit facilities, revolving credit commitments

 

 

11,500

 

 

 —

 

Other loans

 

 

2,017

 

 

2,023

 

Capital leases

 

 

2,872

 

 

3,135

 

Total long-term debt and capital lease obligations

 

 

409,517

 

 

401,017

 

Less current portion of long-term debt and capital lease obligations

 

 

(7,070)

 

 

(6,186)

 

Long-term debt and capital lease obligations, excluding current installments

 

$

402,447

 

$

394,831

 

 

Senior Notes Due 2021

As of September 30, 2018 and December 31, 2017, we were in compliance with all covenants and restrictions associated with, and no events of default existed under, our 8.5% senior unsecured notes due 2021. Our obligations under the senior notes are guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets.

Senior Secured Credit Facilities

We amended the credit agreement governing our senior secured credit facilities in September 2018 to increase the maximum allowable ratio of total debt to consolidated EBITDA (the “Total Leverage Ratio”) to 4.75:1.00 as of the end of each quarter prior to maturity. Prior to the amendment, the Total Leverage Ratio was at 4.00:1.00 and was scheduled to decrease to 3.75:1.00 beginning with the quarter ending December 31, 2018 through maturity.

As of September 30, 2018 and December 31, 2017, we had $11.5 million and $0, respectively, in borrowing under the revolving credit commitments under our senior secured credit facilities. As of September 30, 2018, under the revolving credit commitments, we had no letters of credit outstanding and had a $4.0 million letter of credit outstanding as of December 31, 2017. In October 2018, we amended and restated the revolving credit commitments increasing the total revolving commitments from $100.0 million to $350.0 million. See Note 19, Subsequent Event.

As of September 30, 2018 and December 31, 2017, we were in compliance with all covenants and restrictions associated with, and no events of default existed under, our senior secured credit facilities. Our obligations under the senior secured credit facilities are guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets.

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(12) Related-Party Transactions

Related-party amounts included on the unaudited condensed consolidated statements of operations were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

    

2017 (Recast)

 

    

2018

    

2017 (Recast)

Other revenue

 

$

1,042

 

$

765

 

 

$

3,346

 

$

4,390

Cost of goods sold

 

 

20,133

 

 

17,044

 

 

 

56,184

 

 

47,222

General and administrative expenses

 

 

4,113

 

 

3,735

 

 

 

11,628

 

 

9,908

 

Management Services Agreement

We are party to a Management Services Agreement (the “MSA”) with Enviva Management Company, LLC (the “Provider”), a wholly owned subsidiary of the sponsor. Under the MSA, the Provider provides us with operations, general administrative, management and other services (the “Services”). We are required to reimburse the Provider the amount of all direct or indirect internal or third-party expenses incurred by the Provider in connection with the provision of the Services.

During the three and nine months ended September 30, 2018, $13.4 million and $35.9 million, respectively, related to the MSA was included in cost of goods sold, and $4.1 million and $11.6 million, respectively, was included in general and administrative expenses, on the unaudited condensed consolidated statements of operations. At September 30, 2018, $2.7 million incurred under the MSA was included in finished goods inventory.

During the three and nine months ended September 30, 2017, $9.7 million and $32.9 million, respectively, related to the MSA was included in cost of goods sold, and $3.7 million and $9.9 million, respectively, was included in general and administrative expenses, on the unaudited condensed consolidated statements of operations.

As of September 30, 2018 and December 31, 2017, the Partnership had $18.7 million and $19.6 million, respectively, included in related-party payables primarily related to the MSA.

Common Control Transactions

In October 2017, we purchased all of the issued and outstanding limited liability company interests in Wilmington for total consideration of $130.0 million (see Note 1, Description of Business and Basis of Presentation). The purchase price for the Wilmington Drop-Down included $74.0 million of deferred consideration.

Wilmington will enter into a long-term terminal services agreement (the “Wilmington Hamlet TSA”) with the First Hancock JV and Enviva Pellets Hamlet, LLC (“Hamlet”) to receive, store and load wood pellets from the First Hancock JV’s production plant in Hamlet, North Carolina (the “Hamlet plant”) when the First Hancock JV completes construction of the Hamlet plant. The Wilmington Hamlet TSA also provides for deficiency payments to Wilmington if minimum throughput requirements are not met. Following notice of the anticipated first delivery of wood pellets to the Wilmington terminal from the Hamlet plant, we will enter into the Wilmington Hamlet TSA and make the deferred consideration payment of $74.0 million in cash and/or common units to the First Hancock JV, subject to certain conditions. At September 30, 2018 and December 31, 2017, the $74.0 million was included in related-party long-term payable on the condensed consolidated balance sheets.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Related-Party Indemnification

We acquired Enviva Pellets Sampson, LLC (“Sampson”) in December 2016 (“Sampson Drop-Down”). Sampson owns a wood pellet production plant in Sampson County, North Carolina (the “Sampson plant”). In connection with the Sampson Drop-Down and the Wilmington Drop-Down, the First Hancock JV agreed to indemnify us, our affiliates, and our respective officers, directors, managers, counsel, agents and representatives from all costs and losses arising from certain vendor liabilities and claims related to the construction of the Sampson plant and the Wilmington terminal that were included in the net assets acquired.

We recorded a related-party receivable from the First Hancock JV of $6.4 million for reimbursement of such indemnifiable amounts related to the Sampson Drop-Down. At September 30, 2018 and December 31, 2017, the related-party receivable associated with such amounts was $2.0 million and $3.0 million, respectively.

We recorded a related-party receivable from the First Hancock JV of $1.8 million for reimbursement of such indemnifiable amounts related to the Wilmington Drop-Down. At September 30, 2018 and December 31, 2017, the related-party receivable associated with such amounts was $1.3 million.

Sampson Construction Payments

Pursuant to payment agreements between us and the First Hancock JV, the First Hancock JV agreed to pay an aggregate amount of $2.9 million to us in consideration for costs incurred by us to repair or replace certain equipment at the Sampson plant following the consummation of the Sampson Drop-Down. As of September 30, 2018, $2.9 million has been received and no further amounts are outstanding.

Holdings TSA

Pursuant to the Holdings TSA, the sponsor agreed to deliver a minimum of 125,000 MT of wood pellets per quarter for receipt, storage, handling and loading services by the Wilmington terminal and pay a fixed fee on a per-ton basis for such terminal services. The Holdings TSA remains in effect until September 1, 2026. During the three months and nine months ended September 30, 2018, we recorded $0 and $0.8 million, respectively, as terminal services revenue from the sponsor, which is included in other revenue. During the three and nine months ended September 30, 2017, we recorded $0.6 million and $1.3 million, respectively, as terminal services revenue from the sponsor, which is included in other revenue.

In February 2018, the sponsor amended and assigned the Holdings TSA to Greenwood. Deficiency payments are due to Wilmington if quarterly minimum throughput requirements are not met. During the three and nine months ended September 30, 2018, we recorded $0.5 million and $2.0 million, respectively, of deficiency fees from Greenwood, which is included in other revenue. 

In September 2018, Hurricane Florence impacted the rail line on which wood pellets are typically transported from the Greenwood plant to the Wilmington terminal. As a result, Greenwood was unable to satisfy certain commitments under the Holdings TSA and a contract to purchase wood pellets produced by the Greenwood plant (the “Greenwood contract”) and agreed to pay $1.8 million to us as deficiency fees in consideration of these commitments. Consideration of $0.5 million related to the Holdings TSA was included in other revenue and $1.3 million related to the Greenwood contract was included as a reduction of cost of goods sold.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Enviva FiberCo, LLC

We purchase raw materials from Enviva FiberCo, LLC, a wholly-owned subsidiary of our sponsor. Such raw material purchases during the three and nine months ended September 30, 2018 and 2017 were $1.8 million and $5.3 million and $2.2 million and $6.3 million, respectively.

Biomass Purchase Agreement – Hancock JV

In September 2016, Sampson entered into a confirmation under a master biomass purchase and sale agreement between Enviva, LP and the First Hancock JV pursuant to which Sampson agreed to sell to the sponsor 60,000 MT of wood pellets through August 31, 2017. In June 2017, the sponsor satisfied its take-or-pay obligation under the agreement with a $2.7 million payment to us, which is included in other revenue.

Biomass Option Agreement – Enviva Holdings, LP

In February 2017, Enviva, LP entered into an agreement and a confirmation thereunder with the sponsor (together, the “Option Contract”), pursuant to which Enviva, LP had the option to purchase certain volumes of wood pellets from the sponsor and the sponsor had a corresponding right to re-purchase volumes purchased by Enviva, LP.

Enviva, LP purchased $0 and $1.7 million of wood pellets from the sponsor during the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2017, Enviva, LP purchased $5.2 million and $8.1 million, respectively, of wood pellets from the sponsor. The wood pellet purchase amounts are included in cost of goods sold in our unaudited condensed consolidated statements of operations. The Option Contract terminated in accordance with its terms in March 2018.

EVA-MGT Contracts

In January 2016, we entered into a contract (the “EVA‑MGT Contract”) with the First Hancock JV to supply 375,000 metric tons per year (“MTPY”) of wood pellets  to MGT Teesside Limited’s Tees Renewable Energy Plant (the “Tees REP”), which is under development. As amended, the EVA‑MGT Contract commences in 2019, ramps to full supply in 2021 and continues through 2034. The EVA-MGT Contract is denominated in U.S. Dollars for commissioning volumes in 2019 and in GBP thereafter.

We entered into a second supply agreement with the First Hancock JV in connection with the Sampson Drop-Down to supply an additional 95,000 MTPY of the contracted volume to the Tees REP. The contract, which is denominated in GBP, commences in 2020 and continues through 2034.

Greenwood Contract

In February 2018, we entered into a contract with Greenwood to purchase wood pellets produced by the Greenwood plant through March 2022 and have a take-or-pay obligation with respect to 550,000 MTPY of wood pellets (prorated for partial contract years) beginning in mid-2019.

During the three and nine months ended September 30, 2018, we purchased $8.5 million and $16.8 million, respectively, of wood pellets from Greenwood, of which $6.2 million and $14.5 million, respectively, is included in cost of goods sold. As of September 30, 2018, $2.3 million is included in finished goods inventory and $10.8 million is included in related-party payables related to our wood pellet purchases from Greenwood.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Long-Term Incentive Plan Vesting

During the three and nine months ended September 30, 2018, we paid $2.7 million and $6.7 million, respectively, to the General Partner and the Provider in connection with the settlement of performance-based phantom unit awards under the Enviva Partners, LP Long-Term Incentive Plan (“LTIP”).

(13) Partners’ Capital

Common and Subordinated Units - Sponsor

On May 9, 2018, the sponsor sold to third parties all of the 1,265,453 common units held by the sponsor on such date. On May 30, 2018, all of our 11,905,138 previously outstanding subordinated units, which were held by the sponsor, converted into common units on a one‑for‑one basis. As of September 30, 2018, 11,905,138 common units were held by the sponsor.

Allocations of Net Income

Net income and loss is allocated among the partners of the Partnership in accordance with their respective ownership interest percentages after giving effect, where applicable, to priority income allocations in an amount equal to incentive cash distributions, 100% of which are allocated to the General Partner.

Incentive Distribution Rights

Incentive distribution rights (“IDRs”) represent the right to receive increasing percentages (from 15.0% to 50.0%) of quarterly distributions from operating surplus after distributions in amounts exceeding specified target distribution levels have been achieved by the Partnership. The General Partner currently holds the IDRs, but may transfer these rights at any time.

At-the-Market Offering Program

Pursuant to an equity distribution agreement dated August 8, 2016, we may offer and sell common units from time to time through a group of managers, subject to the terms and conditions set forth in such agreement, of up to an aggregate sales amount of $100.0 million (the “ATM Program”).

During the three months ended September 30, 2018 and 2017, we did not sell common units under the ATM Program. During the nine months ended September 30, 2018, we sold 8,408 common units under the ATM Program for net proceeds of $0.2 million, net of an insignificant amount of commissions. During the three and nine months ended September 30, 2017, we sold 63,577 common units under the ATM Program for net proceeds of $1.7 million, net of an insignificant amount of commissions. Net proceeds from sales under the ATM Program were used for general partnership purposes.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Cash Distributions to Unitholders

Distributions that have been paid or declared related to the reporting period are considered in the determination of earnings per unit. The following table details the cash distribution paid or declared (in millions, except per-unit amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partner for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive

 

 

Declaration

 

Record

 

Payment

 

Distribution 

 

Total Cash

 

Distribution

Quarter Ended

    

Date

    

Date

    

Date

    

Per Unit

    

Distribution

    

Rights

March 31, 2017

 

May 3, 2017

 

May 18, 2017

 

May 30, 2017

 

$

0.5550

 

$

14.6

 

$

0.5

June 30, 2017

 

August 2, 2017

 

August 15, 2017

 

August 29, 2017

 

$

0.5700

 

$

15.0

 

$

0.7

September 30, 2017

 

November 2, 2017

 

November 15, 2017

 

November 29, 2017

 

$

0.6150

 

$

16.2

 

$

1.1

December 31, 2017

 

January 31, 2018

 

February 15, 2018

 

February 28, 2018

 

$

0.6200

 

$

16.3

 

$

1.1

March 31, 2018

 

May 3, 2018

 

May 15, 2018

 

May 29, 2018

 

$

0.6250

 

$

16.5

 

$

1.3

June 30, 2018

 

August 1, 2018

 

August 15, 2018

 

August 29, 2018

 

$

0.6300

 

$

16.7

 

$

1.4

September 30, 2018

 

October 31, 2018

 

November 15, 2018

 

November 29, 2018

 

$

0.6350

 

$

16.8

 

$

1.5

 

For purposes of calculating our earnings per unit under the two-class method, common units are treated as participating preferred units, and the subordinated units were treated as the residual equity interest, or common equity. IDRs are treated as participating securities.

Distributions made in future periods based on the current period calculation of cash available for distribution are allocated to each class of equity that will receive the distribution. Any unpaid cumulative distributions are allocated to the appropriate class of equity.

We determine the amount of cash available for distribution for each quarter in accordance with our partnership agreement. The amount to be distributed to common unitholders, subordinated unitholders and IDR holders is based on the distribution waterfall set forth in our partnership agreement. Net earnings for the quarter are allocated to each class of partnership interest based on the distributions to be made. On May 30, 2018, the subordination period ended in accordance with our partnership agreement and the subordinated units were converted into common units on a one-for-one basis (see Note 17, Net Income (Loss) per Limited Partner Unit).

Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses and gains and losses that pursuant to GAAP are included in comprehensive income (loss) but excluded from net income (loss). Our other comprehensive income (loss) for three and nine months ended September 30, 2018 and 2017 primarily consists of unrealized gains and losses related to derivative instruments accounted for as cash flow hedges.

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The following table presents the changes in accumulated other comprehensive income for the nine months ended September 30, 2018:

 

 

 

 

Balance at December 31, 2017

 

$

(3,040)

Net unrealized gains on derivative instruments

 

 

5,750

Reclassification of net gains on derivative instruments realized into earnings

 

 

(2,076)

Currency translation adjustment

 

 

 1

Accumulated other comprehensive income at September 30, 2018

 

$

635

 

The following table presents the changes in accumulated other comprehensive loss for the nine months ended September 30, 2017:

 

 

 

 

Balance at December 31, 2016

 

$

595

Net unrealized losses on derivative instruments

 

 

(4,641)

Reclassification of net losses on derivative instruments realized into earnings

 

 

161

Accumulated other comprehensive loss at September 30, 2017

 

$

(3,885)

 

Non-controlling Interests—First Hancock JV

Wilmington was a wholly owned subsidiary of the First Hancock JV prior to the consummation of the Wilmington Drop-Down. Our financial statements have been recast to include the financial results of Wilmington as if the consummation of the Wilmington Drop-Down had occurred on May 15, 2013, the date Wilmington was originally organized. The indirect interests of the First Hancock JV’s third-party investors in Wilmington for periods prior to the Wilmington Drop-Down transaction have been reflected as a non-controlling interest in our financial statements. Our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017 include net losses of $0.7 million and $3.1 million, respectively, attributable to the non-controlling interests in Wilmington.

(14) Equity-Based Awards

Affiliate Grants

The following table summarizes information regarding phantom unit awards under the LTIP to employees of the Provider (the “Affiliate Grants”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time-Based

 

Performance-Based

 

Total Affiliate Grant

 

 

Phantom Units

 

Phantom Units

 

Phantom Units

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

Fair Value

 

    

Units

    

(per unit)(1)

    

Units

    

(per unit)(1)

    

Units

    

(per unit)(1)

Nonvested December 31, 2017

 

595,866

 

$

22.32

 

111,104

 

$

25.52

 

706,970

 

$

22.82

Granted

 

386,978

 

$

29.12

 

159,353

 

$

28.83

 

546,331

 

$

29.04

Adjusted

 

 —

 

$

 —

 

19,832

 

$

18.19

 

19,832

 

$

18.19

Forfeitures

 

(83,629)

 

$

25.48

 

(17,469)

 

$

25.76

 

(101,098)

 

$

25.53

Vested

 

(181,536)

 

$

21.42

 

(45,059)

 

$

23.80

 

(226,595)

 

$

21.89

Nonvested September 30, 2018

 

717,679

 

$

25.85

 

227,761

 

$

27.52

 

945,440

 

$

26.25


(1)

Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

At September 30, 2018, $0.2 million is included in related-party payables to the Provider to satisfy the withholding tax requirements associated with 11,037 time-based phantom awards that vested under the LTIP during the three months ended September 30, 2018. We paid $2.7 million to the Provider to satisfy the withholding tax requirements associated with 170,499 time-based phantom unit awards and 45,059 performance-based phantom unit awards that vested under the LTIP during the nine months ended September 30, 2018. On December 31, 2017, 139,810 performance-based phantom unit awards vested. In connection with the settlement of such awards on January 31, 2018, we paid $2.3 million to the General Partner, which then acquired 81,708 common units at a market price of $28.65 per unit from a wholly owned subsidiary of the sponsor to satisfy its obligations under the LTIP. We also paid $1.7 million to the Provider to satisfy the withholding tax requirements associated with such units. The Provider recognized an additional $0.1 million in expense for the change in fair value of these awards between the vesting and settlement date, which was allocated to us in the same manner as other corporate expenses. 

Director Grants

The following table summarizes information regarding phantom unit awards under the LTIP to certain non-employee directors of the General Partner (the “Director Grants”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time-Based 

 

Performance-Based 

 

Total Director Grant

 

 

Phantom Units

 

Phantom Units

 

Phantom Units

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

Fair Value

 

    

Units

    

(per unit)(1)

    

Units

    

(per unit)(1)

    

Units

    

(per unit)(1)

Nonvested December 31, 2017

 

15,840

 

$

25.25

 

 —

 

$

 —

 

15,840

 

$

25.25

Granted

 

13,964

 

$

28.65

 

 —

 

$

 —

 

13,964

 

$

28.65

Vested

 

(15,840)

 

$

25.25

 

 —

 

$

 —

 

(15,840)

 

$

25.25

Nonvested September 30, 2018

 

13,964

 

$

28.65

 

 —

 

$

 —

 

13,964

 

$

28.65


(1)

Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.

In February 2018, Director Grants valued at $0.4 million were granted and vest on the first anniversary of the grant date. In February 2018, the Director Grants that were nonvested at December 31, 2017 vested, and common units were issued in respect thereof.

Distribution Equivalent Rights

Unpaid distribution equivalent rights (“DERs”) amounts related to the performance-based Affiliate Grants at September 30, 2018 were $1.0 million, of which $0.4 million are included in related-party accrued liabilities and $0.6 million are included in other long-term liabilities on the condensed consolidated balance sheets. Unpaid DER amounts related to the performance-based Affiliate Grants at December 31, 2017 were $0.9 million, of which $0.7 million are included in accrued liabilities and $0.2 million are included in other long-term liabilities. DER distributions related to the time- and performance-based Affiliate Grants were $0.6 million and $1.8 million for the three and nine months ended September 30, 2018, respectively. Payments related to DERs for the three and none months ended September 31, 2017 were not significant.

 

 

(15) Income Taxes

Our operations are organized as limited partnerships and entities that are disregarded entities for federal and state income tax purposes. As a result, we are not subject to U.S. federal and most state income taxes. The unitholders of the

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Partnership are liable for these income taxes on their share of our taxable income. 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.

As of September 30, 2018, the only periods subject to examination for federal and state income tax returns are 2015 through 2017. We believe our income tax filing positions, including our status as a pass-through entity, would be sustained on audit and do not anticipate any adjustments that would result in a material change to our unaudited condensed consolidated balance sheet. Therefore, no reserves for uncertain tax positions or interest and penalties have been recorded. For the three and nine months ended September 30, 2018 and 2017, no provision for federal or state income taxes has been recorded in the condensed consolidated financial statements.

(16) Commitments and Contingencies

During the fourth quarter of 2016, we re-purchased a shipment of wood pellets from one customer and subsequently sold it to another customer in a purchase and sale transaction. Smoldering was observed onboard the vessel carrying the shipment, which resulted in damage to a portion of the shipment and one of the vessel’s five cargo holds (the “Shipping Event”). The disponent owner of the vessel (the “Shipowner”) had directly or indirectly chartered the vessel from certain other parties (collectively, the “Head Owners”) and in turn contracted with our wholly owned subsidiary, Enviva Pellets Cottondale, LLC (“Cottondale”), as the charterer of the vessel. Following the mutual appointment of arbitrators in connection with the Shipping Event, in June 2017, the Shipowner submitted claims against Cottondale (the “Claims”) alleging damages of approximately $11.8 million (calculated using exchange rates as of September 30, 2018), together with other unquantified losses and damages. The Claims provide that the Shipowner would seek indemnification and other damages from Cottondale to the extent that the Shipowner is unsuccessful in its defense of claims raised by the Head Owners against it for damages arising in connection with the Shipping Event.

Although it is reasonably possible that the Shipping Event may result in additional costs for our account, responsibility for such costs and liabilities incurred in connection with the Shipping Event is disputed among the various parties involved. If any such costs and liabilities ultimately are allocated to us, a portion may be recovered under insurance. We believe that we have meritorious defenses to the Claims, but are generally unable to predict the timing or outcome of any claims or proceedings, including the Claims, associated with the Shipping Event, or any insurance recoveries in respect thereof. Consequently, we are unable to provide an estimate of the amount or range of possible loss.

(17) Net Income (Loss) per Limited Partner Unit

Net income (loss) per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income (loss), after deducting any incentive distributions, by the weighted-average number of outstanding common and subordinated units. Our net income (loss) is allocated to the limited partners in accordance with their respective ownership percentages, after giving effect to priority income allocations for incentive distributions, if any, to the holder of the IDRs, which are declared and paid following the close of each quarter. Earnings in excess of distributions are allocated to the limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income (loss) allocations used in the calculation of earnings per unit.

On May 30, 2018, the requirements under our partnership agreement for the conversion of all of our subordinated units into common units were satisfied and the subordination period for such subordinated units ended. As a result, all of our 11,905,138 outstanding subordinated units converted into common units on a one-for-one basis. The conversion did not impact the amount of the cash distribution paid or the total number of our outstanding units representing limited partner interests. Our net income (loss) was allocated to the general partner and the limited partners, including the holders of the subordinated units and IDR holders in accordance with our partnership agreement.

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

In addition to the common and subordinated units, we have also identified the IDRs and phantom units as participating securities and use the two-class method when calculating the net income (loss) per unit applicable to limited partners, which is based on the weighted-average number of common units and subordinated 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. Basic and diluted earnings per unit applicable to subordinated limited partners are the same because there are no potentially dilutive subordinated units outstanding.

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The following computation of net income (loss) per limited partner unit is as follows for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

    

Common

 

Subordinated

 

General

 

     

Units

     

Units

     

Partner

Weighted-average common units outstanding—basic

 

 

26,477

 

 

 —

 

 

 —

Effect of nonvested phantom units

 

 

1,001

 

 

 —

 

 

 —

Weighted-average common units outstanding—diluted

 

 

27,478

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

    

Common

 

Subordinated

 

General

    

 

 

 

    

Units

    

Units

    

Partner

    

Total

 

 

 

Distributions declared

 

$

16,814

 

$

 —

 

$

1,532

 

$

18,346

Earnings less than distributions

 

 

(4,990)

 

 

 —

 

 

 —

 

 

(4,990)

Net income attributable to partners

 

$

11,824

 

$

 —

 

$

1,532

 

$

13,356

Weighted-average units outstanding—basic

 

 

26,477

 

 

 —

 

 

 

 

 

 

Weighted-average units outstanding—diluted

 

 

27,478

 

 

 —

 

 

 

 

 

 

Net income per limited partner unit—basic

 

$

0.45

 

$

 —

 

 

 

 

 

 

Net income per limited partner unit—diluted

 

$

0.43

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

    

Common

 

Subordinated

 

General

 

     

Units

     

Units

     

Partner

Weighted-average common units outstanding—basic

 

 

19,866

 

 

6,541

 

 

 —

Effect of nonvested phantom units

 

 

 —

 

 

 —

 

 

 —

Weighted-average common units outstanding—diluted

 

 

19,866

 

 

6,541

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

    

Common

 

Subordinated

 

General

    

 

 

 

    

Units

    

Units

    

Partner

    

Total

Distributions declared

 

$

37,618

 

$

12,386

 

$

4,197

 

$

54,201

Earnings less than distributions

 

 

(42,607)

 

 

(14,029)

 

 

 —

 

 

(56,636)

Net (loss) income attributable to partners

 

$

(4,989)

 

$

(1,643)

 

$

4,197

 

$

(2,435)

Weighted-average units outstanding—basic and diluted

 

 

19,866

 

 

6,541

 

 

 

 

 

 

Net loss per limited partner unit—basic and diluted

 

$

(0.25)

 

$

(0.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

    

Common

    

Subordinated

    

General

 

    

 Units

    

Units

    

Partner

Weighted-average common units outstanding—basic

 

 

14,412

 

 

11,905

 

 

 —

Effect of nonvested phantom units

 

 

973

 

 

 —

 

 

 —

Weighted-average common units outstanding—diluted

 

 

15,385

 

 

11,905

 

 

 —

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

    

Common

    

Subordinated

    

General

    

 

 

    

Units

    

Units

    

Partner

    

Total

Distributions declared

 

$

8,863

 

$

7,322

 

$

1,063

 

$

17,248

Earnings less than distributions

 

 

(5,974)

 

 

(4,935)

 

 

 —

 

 

(10,909)

Net income attributable to partners

 

$

2,889

 

$

2,387

 

$

1,063

 

$

6,339

Weighted-average units outstanding—basic

 

 

14,412

 

 

11,905

 

 

 

 

 

 

Weighted-average units outstanding—diluted

 

 

15,385

 

 

11,905

 

 

 

 

 

 

Net income per limited partner unit—basic

 

$

0.20

 

$

0.20

 

 

 

 

 

 

Net income per limited partner unit—diluted

 

$

0.19

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

    

Common

    

Subordinated

    

General

 

    

 Units

    

Units

    

Partner

Weighted-average common units outstanding—basic

 

 

14,400

 

 

11,905

 

 

 —

Effect of nonvested phantom units

 

 

943

 

 

 —

 

 

 —

Weighted-average common units outstanding—diluted

 

 

15,343

 

 

11,905

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

    

Common

    

Subordinated

    

General

    

 

 

    

Units

    

Units

    

Partner

    

Total

Distributions declared

 

$

25,077

 

$

20,715

 

$

2,269

 

$

48,061

Earnings less than distributions

 

 

(19,345)

 

 

(15,980)

 

 

 —

 

 

(35,325)

Net income attributable to partners

 

$

5,732

 

$

4,735

 

$

2,269

 

$

12,736

Weighted-average units outstanding—basic

 

 

14,400

 

 

11,905

 

 

 

 

 

 

Weighted-average units outstanding—diluted

 

 

15,343

 

 

11,905

 

 

 

 

 

 

Net income per limited partner unit—basic

 

$

0.40

 

$

0.40

 

 

 

 

 

 

Net income per limited partner unit—diluted

 

$

0.37

 

$

0.40

 

 

 

 

 

 

 

 

(18) Supplemental Guarantor Information

Enviva Partners, LP and Enviva Partners Finance Corp., are the co-issuers of our senior notes on a joint and several basis. Enviva Partners, LP has no material independent assets or operations. Our senior notes are guaranteed on a senior unsecured basis by certain of our direct and indirect wholly owned subsidiaries (excluding Enviva Partners Finance Corp. and certain immaterial subsidiaries, collectively, the “Non-Guarantor Subsidiaries”) and will be guaranteed by our future restricted subsidiaries that guarantee certain of our other indebtedness (collectively, the “Subsidiary Guarantors”). The guarantees are full and unconditional and joint and several. Each of the Subsidiary Guarantors is directly or indirectly 100% owned by the Partnership. Enviva Partners Finance Corp. is a finance subsidiary formed for the purpose of being the co-issuer of our senior notes. Other than certain restrictions arising under our senior secured credit facilities and our senior notes (see Note 11,  Long-Term Debt and Capital Lease Obligations), there are no significant restrictions on the ability of any restricted subsidiary to (1) pay dividends or make any other distributions to the Partnership or any of its restricted subsidiaries or (2) make loans or Borrowings to the Partnership or any of its restricted subsidiaries. As of September 30, 2018, our non-guarantor subsidiaries net loss was more than 3% of our consolidated net loss for the nine months ended September 30, 2018. As such, and in accordance with Rule 3-10 of Regulation S-X, supplemental consolidating financial statements have been prepared from our financial information on the same basis of accounting as our consolidated financial statements. In periods prior to September 30, 2018, condensed consolidating financial

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

information required under Rule 3-10 was not provided as our non-guarantor subsidiaries were considered minor or were not required to be presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

    

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

786

 

$

77

 

$

 —

 

$

863

Accounts receivable, net

 

 

49,152

 

 

 —

 

 

 —

 

 

49,152

Related-party receivables

 

 

10,355

 

 

4,611

 

 

(9,431)

 

 

5,535

Inventories

 

 

34,322

 

 

 —

 

 

 —

 

 

34,322

Prepaid expenses and other current assets

 

 

1,643

 

 

 —

 

 

 —

 

 

1,643

Total current assets

 

 

96,258

 

 

4,688

 

 

(9,431)

 

 

91,515

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

552,456

 

 

 —

 

 

 —

 

 

552,456

Intangible assets, net

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Goodwill

 

 

85,615

 

 

 —

 

 

 —

 

 

85,615

Other long-term assets

 

 

4,783

 

 

 —

 

 

 —

 

 

4,783

Total assets

 

$

739,112

 

$

4,688

 

$

(9,431)

 

$

734,369

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,730

 

$

 —

 

$

 —

 

$

10,730

Related-party payables and accrued liabilities

 

 

34,900

 

 

4,820

 

 

(9,431)

 

 

30,289

Accrued and other current liabilities

 

 

35,849

 

 

 —

 

 

 —

 

 

35,849

Current portion of interest payable

 

 

12,573

 

 

 —

 

 

 —

 

 

12,573

Current portion of long-term debt and capital lease obligations

 

 

7,070

 

 

 —

 

 

 —

 

 

7,070

Total current liabilities

 

 

101,122

 

 

4,820

 

 

(9,431)

 

 

96,511

Long-term debt and capital lease obligations

 

 

402,447

 

 

 —

 

 

 —

 

 

402,447

Related-party long-term payable

 

 

74,000

 

 

 —

 

 

 —

 

 

74,000

Long-term interest payable

 

 

980

 

 

 —

 

 

 —

 

 

980

Other long-term liabilities

 

 

4,687

 

 

 —

 

 

 —

 

 

4,687

Total liabilities

 

 

583,236

 

 

4,820

 

 

(9,431)

 

 

578,625

Total Enviva Partners, LP partners’ capital

 

 

155,876

 

 

(132)

 

 

 —

 

 

155,744

Total liabilities and partners’ capital

 

$

739,112

 

$

4,688

 

$

(9,431)

 

$

734,369

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

524

 

$

 —

 

$

 —

 

$

524

Accounts receivable, net

 

 

79,185

 

 

 —

 

 

 —

 

 

79,185

Related-party receivables

 

 

5,412

 

 

 —

 

 

 —

 

 

5,412

Inventories

 

 

23,536

 

 

 —

 

 

 —

 

 

23,536

Prepaid expenses and other current assets

 

 

1,006

 

 

 —

 

 

 —

 

 

1,006

Total current assets

 

 

109,663

 

 

 —

 

 

 —

 

 

109,663

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

562,330

 

 

 —

 

 

 —

 

 

562,330

Intangible assets, net

 

 

109

 

 

 —

 

 

 —

 

 

109

Goodwill

 

 

85,615

 

 

 —

 

 

 —

 

 

85,615

Other long-term assets

 

 

2,394

 

 

 —

 

 

 —

 

 

2,394

Total assets

 

$

760,111

 

$

 —

 

$

 —

 

$

760,111

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,554

 

$

 —

 

$

 —

 

$

7,554

Related-party payables and accrued liabilities

 

 

26,398

 

 

 —

 

 

 —

 

 

26,398

Accrued and other current liabilities

 

 

29,363

 

 

 —

 

 

 —

 

 

29,363

Current portion of interest payable

 

 

5,029

 

 

 —

 

 

 —

 

 

5,029

Current portion of long-term debt and capital lease obligations

 

 

6,186

 

 

 —

 

 

 —

 

 

6,186

Total current liabilities

 

 

74,530

 

 

 —

 

 

 —

 

 

74,530

Long-term debt and capital lease obligations

 

 

394,831

 

 

 —

 

 

 —

 

 

394,831

Related-party long-term payable

 

 

74,000

 

 

 —

 

 

 —

 

 

74,000

Long-term interest payable

 

 

890

 

 

 —

 

 

 —

 

 

890

Other long-term liabilities

 

 

5,491

 

 

 —

 

 

 —

 

 

5,491

Total liabilities

 

 

549,742

 

 

 —

 

 

 —

 

 

549,742

Total Enviva Partners, LP partners’ capital

 

 

210,369

 

 

 —

 

 

 —

 

 

210,369

Total liabilities and partners’ capital

 

$

760,111

 

$

 —

 

$

 —

 

$

760,111

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

For the Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Product sales

 

$

142,541

 

$

 —

 

$

 —

 

$

142,541

Other revenue

 

 

1,607

 

 

 —

 

 

 —

 

 

1,607

Net revenue

 

 

144,148

 

 

 —

 

 

 —

 

 

144,148

Cost of goods sold

 

 

103,695

 

 

 —

 

 

 —

 

 

103,695

Loss on disposal of assets

 

 

656

 

 

 —

 

 

 —

 

 

656

Depreciation and amortization

 

 

9,678

 

 

 —

 

 

 —

 

 

9,678

Total cost of goods sold

 

 

114,029

 

 

 —

 

 

 —

 

 

114,029

Gross margin

 

 

30,119

 

 

 —

 

 

 —

 

 

30,119

General and administrative expenses

 

 

7,287

 

 

28

 

 

 —

 

 

7,315

Income (loss) from operations

 

 

22,832

 

 

(28)

 

 

 —

 

 

22,804

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,445)

 

 

 —

 

 

 —

 

 

(9,445)

Other (expense) income:

 

 

(12)

 

 

 9

 

 

 —

 

 

(3)

Total other (expense) income, net

 

 

(9,457)

 

 

 9

 

 

 —

 

 

(9,448)

Net income (loss)

 

 

13,375

 

 

(19)

 

 

 —

 

 

13,356

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net income (loss) attributable to Enviva Partners, LP

 

$

13,375

 

$

(19)

 

$

 —

 

$

13,356

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

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

 

$

13,375

 

$

(19)

 

$

 —

 

$

13,356

 

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Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

For the Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Product sales

 

$

125,422

 

$

 —

 

$

 —

 

$

125,422

Other revenue

 

 

6,801

 

 

 —

 

 

 —

 

 

6,801

Net revenue

 

 

132,223

 

 

 —

 

 

 —

 

 

132,223

Cost of goods sold

 

 

101,102

 

 

(205)

 

 

 —

 

 

100,897

Loss on disposal of assets

 

 

1,237

 

 

 —

 

 

 —

 

 

1,237

Depreciation and amortization

 

 

9,707

 

 

 —

 

 

 —

 

 

9,707

Total cost of goods sold

 

 

112,046

 

 

(205)

 

 

 —

 

 

111,841

Gross margin

 

 

20,177

 

 

205

 

 

 —

 

 

20,382

General and administrative expenses

 

 

7,493

 

 

211

 

 

 —

 

 

7,704

Income (loss) from operations

 

 

12,684

 

 

(6)

 

 

 —

 

 

12,678

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,653)

 

 

 —

 

 

 —

 

 

(7,653)

Other expense

 

 

(2)

 

 

 —

 

 

 —

 

 

(2)

Total other expense, net

 

 

(7,655)

 

 

 —

 

 

 —

 

 

(7,655)

Net income (loss)

 

 

5,029

 

 

(6)

 

 

 —

 

 

5,023

Less net loss attributable to noncontrolling partners’ interests

 

 

660

 

 

 5

 

 

 —

 

 

665

Net income (loss) attributable to Enviva Partners, LP

 

$

5,689

 

$

(1)

 

$

 —

 

$

5,688

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

 

 

(651)

 

 

 —

 

 

 —

 

 

(651)

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

 

$

6,340

 

$

(1)

 

$

 —

 

$

6,339

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Product sales

 

$

398,031

 

$

 —

 

$

 —

 

$

398,031

Other revenue

 

 

7,037

 

 

 —

 

 

 —

 

 

7,037

Net revenue

 

 

405,068

 

 

 —

 

 

 —

 

 

405,068

Cost of goods sold

 

 

330,456

 

 

 —

 

 

 —

 

 

330,456

Loss on disposal of assets

 

 

900

 

 

 —

 

 

 —

 

 

900

Depreciation and amortization

 

 

28,800

 

 

 —

 

 

 —

 

 

28,800

Total cost of goods sold

 

 

360,156

 

 

 —

 

 

 —

 

 

360,156

Gross margin

 

 

44,912

 

 

 —

 

 

 —

 

 

44,912

General and administrative expenses

 

 

21,358

 

 

48

 

 

 —

 

 

21,406

Income (loss) from operations

 

 

23,554

 

 

(48)

 

 

 —

 

 

23,506

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(27,137)

 

 

 —

 

 

 —

 

 

(27,137)

Other income (expense)

 

 

1,281

 

 

(85)

 

 

 —

 

 

1,196

Total other expense, net

 

 

(25,856)

 

 

(85)

 

 

 —

 

 

(25,941)

Net loss

 

 

(2,302)

 

 

(133)

 

 

 —

 

 

(2,435)

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Enviva Partners, LP

 

$

(2,302)

 

$

(133)

 

$

 —

 

$

(2,435)

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Enviva Partners, LP limited partners’ interest in net loss

 

$

(2,302)

 

$

(133)

 

$

 —

 

$

(2,435)

 

41


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Product sales

 

$

363,689

 

$

2,453

 

$

 —

 

$

366,142

Other revenue

 

 

16,071

 

 

 —

 

 

 —

 

 

16,071

Net revenue

 

 

379,760

 

 

2,453

 

 

 —

 

 

382,213

Cost of goods sold

 

 

294,542

 

 

2,244

 

 

 —

 

 

296,786

Loss on disposal of assets

 

 

3,242

 

 

 —

 

 

 —

 

 

3,242

Depreciation and amortization

 

 

29,104

 

 

 —

 

 

 —

 

 

29,104

Total cost of goods sold

 

 

326,888

 

 

2,244

 

 

 —

 

 

329,132

Gross margin

 

 

52,872

 

 

209

 

 

 —

 

 

53,081

General and administrative expenses

 

 

21,666

 

 

1,671

 

 

 —

 

 

23,337

Income (loss) from operations

 

 

31,206

 

 

(1,462)

 

 

 —

 

 

29,744

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(23,070)

 

 

 —

 

 

 —

 

 

(23,070)

Other expense

 

 

(199)

 

 

 —

 

 

 —

 

 

(199)

Total other expense, net

 

 

(23,269)

 

 

 —

 

 

 —

 

 

(23,269)

Net income (loss)

 

 

7,937

 

 

(1,462)

 

 

 —

 

 

6,475

Less net loss attributable to noncontrolling partners’ interests

 

 

3,139

 

 

41

 

 

 —

 

 

3,180

Net income (loss) attributable to Enviva Partners, LP

 

$

11,076

 

$

(1,421)

 

$

 —

 

$

9,655

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

 

 

(3,081)

 

 

 —

 

 

 —

 

 

(3,081)

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

 

$

14,157

 

$

(1,421)

 

$

 —

 

$

12,736

 

42


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income

For the Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Net income (loss)

    

$

13,375

 

$

(19)

 

$

 —

 

$

13,356

Other comprehensive income (loss):

 

 

  

 

 

 

 

 

 

 

 

  

Net unrealized gains on cash flow hedges

 

 

2,713

 

 

 —

 

 

 —

 

 

2,713

Reclassification of net gains realized into net income (loss)

 

 

(2,013)

 

 

 —

 

 

 —

 

 

(2,013)

Currency translation adjustment

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Total other comprehensive income

 

 

700

 

 

 1

 

 

 —

 

 

701

Total comprehensive income (loss)

 

 

14,075

 

 

(18)

 

 

 —

 

 

14,057

Less:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

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

 

 

14,075

 

 

(18)

 

 

 —

 

 

14,057

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Comprehensive income (loss) attributable to Enviva Partners, LP partners

 

$

14,075

 

$

(18)

 

$

 —

 

$

14,057

 

43


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income

For the Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Net income (loss)

    

$

5,029

 

$

(6)

 

$

 —

 

$

5,023

Other comprehensive income (loss):

 

 

  

 

 

 

 

 

 

 

 

  

Net unrealized losses on cash flow hedges

 

 

(1,788)

 

 

 —

 

 

 —

 

 

(1,788)

Reclassification of net gains realized into net income

 

 

55

 

 

 —

 

 

 —

 

 

55

Total other comprehensive loss

 

 

(1,733)

 

 

 —

 

 

 —

 

 

(1,733)

Total comprehensive income (loss)

 

 

3,296

 

 

(6)

 

 

 —

 

 

3,290

Less:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(651)

 

 

 —

 

 

 —

 

 

(651)

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

 

 

3,947

 

 

(6)

 

 

 —

 

 

3,941

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

(660)

 

 

(5)

 

 

 —

 

 

(665)

Comprehensive income (loss) attributable to Enviva Partners, LP partners

 

$

4,607

 

$

(1)

 

$

 —

 

$

4,606

 

44


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income

For the Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Net loss

    

$

(2,302)

 

$

(133)

 

$

 —

 

$

(2,435)

Other comprehensive income (loss):

 

 

  

 

 

 

 

 

 

 

 

  

Net unrealized gains on cash flow hedges

 

 

5,750

 

 

 —

 

 

 —

 

 

5,750

Reclassification of net gains realized into net income

 

 

(2,076)

 

 

 —

 

 

 —

 

 

(2,076)

Currency translation adjustment

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Total other comprehensive income

 

 

3,674

 

 

 1

 

 

 —

 

 

3,675

Total comprehensive income (loss)

 

 

1,372

 

 

(132)

 

 

 —

 

 

1,240

Less:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

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

 

 

1,372

 

 

(132)

 

 

 —

 

 

1,240

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Comprehensive income (loss) attributable to Enviva Partners, LP partners

 

$

1,372

 

$

(132)

 

$

 —

 

$

1,240

 

45


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income

For the Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor Subsidiaries

    

Non-Guarantor Subsidiaries

    

Eliminations

 

Consolidated

Net income (loss)

    

$

7,937

 

$

(1,462)

 

$

 —

 

$

6,475

Other comprehensive income (loss):

 

 

  

 

 

 

 

 

 

 

 

  

Net unrealized losses on cash flow hedges

 

 

(4,641)

 

 

 —

 

 

 —

 

 

(4,641)

Reclassification of net gains realized into net income

 

 

161

 

 

 —

 

 

 —

 

 

161

Total other comprehensive loss

 

 

(4,480)

 

 

 —

 

 

 —

 

 

(4,480)

Total comprehensive income (loss)

 

 

3,457

 

 

(1,462)

 

 

 —

 

 

1,995

Less:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(3,081)

 

 

 —

 

 

 —

 

 

(3,081)

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

 

 

6,538

 

 

(1,462)

 

 

 —

 

 

5,076

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

(3,139)

 

 

(41)

 

 

 —

 

 

(3,180)

Comprehensive income (loss) attributable to Enviva Partners, LP partners

 

$

9,677

 

$

(1,421)

 

$

 —

 

$

8,256

 

46


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

Guarantor Subsidiaries

 

 

Non-Guarantor Subsidiaries

    

 

Eliminations

    

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,302)

 

$

(133)

 

$

 —

 

$

(2,435)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29,240

 

 

 —

 

 

 —

 

 

29,240

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

 

 

828

 

 

 —

 

 

 —

 

 

828

Loss on disposal of assets

 

 

900

 

 

 —

 

 

 —

 

 

900

Unit-based compensation

 

 

5,604

 

 

 —

 

 

 —

 

 

5,604

De-designation of foreign currency forwards and options

 

 

 

 

 

 —

 

 

 —

 

 

 

De-designation of foreign currency forwards and options

 

 

(1,947)

 

 

 —

 

 

 —

 

 

(1,947)

Fair value changes in derivatives

 

 

(4,465)

 

 

 —

 

 

 —

 

 

(4,465)

Unrealized loss on foreign currency transactions

 

 

31

 

 

 1

 

 

 —

 

 

32

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

30,004

 

 

 —

 

 

 —

 

 

30,004

Related-party receivables

 

 

(4,943)

 

 

(4,611)

 

 

9,431

 

 

(123)

Prepaid expenses and other assets

 

 

(160)

 

 

 —

 

 

 —

 

 

(160)

Inventories

 

 

(9,735)

 

 

 —

 

 

 —

 

 

(9,735)

Derivatives

 

 

5,080

 

 

 —

 

 

 —

 

 

5,080

Accounts payable, accrued liabilities and other current liabilities

 

 

5,475

 

 

 —

 

 

 —

 

 

5,475

Related-party payables and accrued liabilities

 

 

7,928

 

 

4,820

 

 

(9,431)

 

 

3,317

Accrued interest

 

 

7,634

 

 

 —

 

 

 —

 

 

7,634

Other current liabilities

 

 

234

 

 

 —

 

 

 —

 

 

234

Other long-term liabilities

 

 

648

 

 

 —

 

 

 —

 

 

648

Net cash provided by operating activities

 

 

70,054

 

 

77

 

 

 —

 

 

70,131

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(16,034)

 

 

 —

 

 

 —

 

 

(16,034)

Insurance proceeds from property loss

 

 

1,130

 

 

 —

 

 

 —

 

 

1,130

Net cash used in investing activities

 

 

(14,904)

 

 

 —

 

 

 —

 

 

(14,904)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on debt and capital lease obligations

 

 

(4,745)

 

 

 —

 

 

 —

 

 

(4,745)

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

 

 

241

 

 

 —

 

 

 —

 

 

241

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

 

 

(55,163)

 

 

 —

 

 

 —

 

 

(55,163)

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

 

 

(2,341)

 

 

 —

 

 

 —

 

 

(2,341)

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

 

 

(4,380)

 

 

 —

 

 

 —

 

 

(4,380)

Proceeds and payments on revolving credit commitments

 

 

11,500

 

 

 —

 

 

 —

 

 

11,500

Net cash used in financing activities

 

 

(54,888)

 

 

 —

 

 

 —

 

 

(54,888)

Net increase in cash, cash equivalents and restricted cash

 

 

262

 

 

77

 

 

 —

 

 

339

Cash, cash equivalents and restricted cash, beginning of period

 

 

524

 

 

 —

 

 

 —

 

 

524

Cash, cash equivalents and restricted cash, end of period

 

$

786

 

$

77

 

$

 —

 

$

863

 

47


 

Table of Contents

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows

For the nine months ended September 30, 2017

 

    

 

Guarantor Subsidiaries

 

 

Non-Guarantor Subsidiaries

    

 

Eliminations

    

 

Consolidated

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,937

 

$

(1,462)

 

$

 —

 

$

6,475

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,927

 

 

188

 

 

 —

 

 

29,115

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

 

 

1,161

 

 

 —

 

 

 —

 

 

1,161

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

 

 

1,338

 

 

 —

 

 

 —

 

 

1,338

Loss on disposal of assets

 

 

3,242

 

 

 —

 

 

 —

 

 

3,242

Unit-based compensation

 

 

5,113

 

 

 —

 

 

 —

 

 

5,113

Fair value changes in derivatives

 

 

(13)

 

 

 —

 

 

 —

 

 

(13)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

28,026

 

 

 —

 

 

 —

 

 

28,026

Related-party receivables

 

 

(3,312)

 

 

 —

 

 

 —

 

 

(3,312)

Prepaid expenses and other assets

 

 

76

 

 

 —

 

 

 —

 

 

76

Assets held for sale

 

 

 —

 

 

(310)

 

 

 —

 

 

(310)

Inventories

 

 

(6,245)

 

 

1,812

 

 

 —

 

 

(4,433)

Other long-term assets

 

 

86

 

 

 —

 

 

 —

 

 

86

Derivatives

 

 

(1,442)

 

 

 —

 

 

 —

 

 

(1,442)

Accounts payable, accrued liabilities and other current liabilities

 

 

(6,845)

 

 

 —

 

 

 —

 

 

(6,845)

Related-party payables and accrued liabilities

 

 

9,147

 

 

(315)

 

 

 —

 

 

8,832

Accrued interest

 

 

6,301

 

 

 —

 

 

 —

 

 

6,301

Other long-term liabilities

 

 

621

 

 

 —

 

 

 —

 

 

621

Net cash provided by operating activities

 

 

74,118

 

 

(87)

 

 

 —

 

 

74,031

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 —

Purchases of property, plant and equipment

 

 

(21,916)

 

 

 —

 

 

 —

 

 

(21,916)

Net cash used in investing activities

 

 

(21,916)

 

 

 —

 

 

 —

 

 

(21,916)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on debt and capital lease obligations

 

 

(3,428)

 

 

 —

 

 

 —

 

 

(3,428)

Cash paid related to debt issuance costs

 

 

(209)

 

 

 —

 

 

 —

 

 

(209)

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

 

 

1,715

 

 

 —

 

 

 —

 

 

1,715

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

 

 

(46,323)

 

 

 —

 

 

 —

 

 

(46,323)

Proceeds and payments on revolving credit commitments

 

 

(6,500)

 

 

 —

 

 

 —

 

 

(6,500)

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

 

 

1,652

 

 

 —

 

 

 —

 

 

1,652

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

 

 

9,965

 

 

 —

 

 

 —

 

 

9,965

Net cash used in financing activities

 

 

(43,128)

 

 

 —

 

 

 —

 

 

(43,128)

Net increase in cash, cash equivalents and restricted cash

 

 

9,074

 

 

(87)

 

 

 —

 

 

8,987

Cash, cash equivalents and restricted cash, beginning of period

 

 

362

 

 

104

 

 

 —

 

 

466

Cash, cash equivalents and restricted cash, end of period

 

$

9,436

 

$

17

 

$

 —

 

$

9,453

 

 

 

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

(19) Subsequent Event

In October 2018, we amended and restated the revolving credit commitments under the senior secured credit facilities, increasing the revolving commitments from $100.0 million to $350.0 million and extending the maturity from April 2020 to October 2023. We used $41.2 million of the revolving credit commitments to fully repay the outstanding amounts on the Tranche A-1 and A-3 borrowings under the senior secured credit facilities.

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Enviva Partners, LP, together with its subsidiaries (“we,” “us,” “our,” or the “Partnership”), is a Delaware limited partnership formed on November 12, 2013. Our sponsor is Enviva Holdings, LP (and, where applicable, its wholly owned subsidiary Enviva Development Holdings, LLC) and references to our General Partner refer to Enviva Partners GP, LLC, a wholly owned subsidiary of our sponsor. References to the “First Hancock JV” refer to Enviva Wilmington Holdings, LLC, a joint venture between our sponsor, Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company (U.S.A.).

The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis in Part II‑Item 7 of our Annual Report on Form 10‑K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”). Our 2017 Form 10‑K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates and contractual obligations. You should also read the following discussion and analysis together with the risk factors set forth in the 2017 Form 10‑K and the factors described under “Cautionary Statement Regarding Forward‑Looking Information” in this Quarterly Report on Form 10‑Q.

Basis of Presentation

The following discussion of our historical performance and financial condition is derived from our audited and unaudited condensed consolidated financial statements.

In October 2017, we acquired from the First Hancock JV all of the issued and outstanding limited liability company interests in Enviva Port of Wilmington, LLC (“Wilmington”) for total consideration of $130.0 million (the “Wilmington Drop‑Down”).

As a result, our unaudited condensed consolidated financial statements for periods prior to October 2017 have been retroactively recast to reflect the consummation of the Wilmington Drop‑Down as if it had occurred on May 15, 2013, the date Wilmington was originally organized. Combinations of entities under common control are recorded at historical cost.

Business Overview

We are the world’s largest supplier by production capacity of utility‑grade wood pellets to major power generators. We own and operate six industrial‑scale production plants in the Southeastern United States that have a combined wood pellet production capacity of 2.9 million metric tons per year (“MTPY”). We also own dry-bulk, deep‑water marine terminal assets at the Port of Chesapeake (the “Chesapeake terminal”) and the Port of Wilmington, North Carolina (the “Wilmington terminal”). All of our facilities are located in geographic regions with low input costs and favorable transportation logistics. Owning these cost advantaged assets, the output from which is fully contracted, in a rapidly expanding industry provides us with a platform to generate stable and growing cash flows that should enable us to increase our per‑unit cash distributions over time, which is our primary business objective.

Our sales strategy is to fully contract our production capacity. During 2018, contracted volumes under our existing off‑take contracts are approximately equal to our full production capacity. Our off‑take contracts provide for sales of 2.9 million metric tons (“MT”) of wood pellets in 2018 and have a weighted‑average remaining term of 9.4 years from October 1, 2018. We intend to continue expanding our business by taking advantage of the growing demand for our product that is driven by the conversion of coal‑fired power generation and combined heat and power plants to co‑fired or dedicated biomass‑fired plants, principally in Europe and Japan.

Recent Developments

Inventory Impairment and Asset Disposal

On February 27, 2018, a fire occurred at the Chesapeake terminal, causing damage to equipment and approximately 43,000 MT of wood pellets (the “Chesapeake Incident”). In order to continue to meet our contractual obligations to our customers, we commissioned temporary wood pellet storage, handling and ship loading operations (collectively,

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“business continuity activities”) at nearby locations. The wood pellets from our production plants in the Mid-Atlantic region were delivered to such temporary locations as well as to the Wilmington terminal, which increased our distribution costs. The Chesapeake terminal returned to operation on June 28, 2018.

We incurred several costs as a result of the Chesapeake Incident, including, among others, inventory write-off and disposal costs, emergency response costs, and asset repair costs. During the three and nine months ended September 30, 2018, we incurred costs related to the value of lost inventory, inclusive of disposal costs, of $0 and $10.7 million, respectively, and emergency response costs of $0.5 million and $12.9 million, respectively. Amounts associated with repairing or disposing of damaged assets were $3.6 million and $13.0 million during the three and nine months ended September 30, 2018, respectively. The costs related to the Chesapeake Incident, which are included in our financial results as a reduction of net income, have been added back in our calculation of adjusted EBITDA. Our adjusted EBITDA calculation during the three and nine months ended September 30, 2018 included an addback of $3.6 million of costs, offset by $10.4 million of insurance recoveries, and $31.6 million of costs, offset by $22.6 million of insurance recoveries, respectively, in our calculation of adjusted EBITDA.

Business continuity activities also reduced adjusted EBITDA during the three and nine months ended September 30, 2018. The incremental costs of our extended logistics chain were $6.1 million, offset by $11.4 million of insurance recoveries, and $25.7 million, offset by $24.4 million of insurance recoveries, for the three and nine months ended September 30, 2018, respectively.

During the nine months ended September 30, 2018, we have recorded $1.1 million of insurance recoveries related to lost profits.

As of September 30, 2018, we have recognized approximately $49.2 million of insurance recoveries related to the Chesapeake Incident including $1.7 million in accounts receivable. We subsequently received the $1.7 million of insurance recoveries in October 2018.

We expect substantially all of the operational costs from the Chesapeake Incident to be recoverable under our insurance policies and other contractual rights, but the timing of such costs and the associated insurance recoveries will likely not match. Consequently, our results of operations and cash flows, as well as our non-GAAP financial measures, may not be comparable to those for previously reported periods and our quarterly distribution coverage ratios may not be comparable to those for previously reported periods or our full-year target.

Customer Contracts

During the nine months ended September 30, 2018, we have executed the following new take-or-pay off-take contracts:

·

A 5-year, 650,000 MTPY contract with Drax commencing in 2022 and continuing through 2026;

·

A 15-year, 180,000 MTPY contract with Marubeni Corporation commencing in 2022; and

·

A 10-year, 100,000 MTPY contract with Marubeni Corporation commencing in 2022.

During the nine months ended September 30, 2018, the Partnership and Enviva JV Development Company, LLC our sponsor’s joint venture with affiliates of John Hancock (the “Second Hancock JV”) entered into 15-year take-or-pay contracts with Mitsubishi Corporation for the supply of 630,000 MTPY of wood pellets commencing in 2022. The Partnership and the Second Hancock JV entered into contracts to supply 180,000 MTPY of wood pellets and 450,000 MTPY of wood pellets, respectively.

During the nine months ended September 30, 2018, our sponsor executed new take-or-pay off-take contacts with Sumitomo Corporation to supply a total of 520,000 MTPY to new biomass power plants in Japan. These two new contracts, which we expect to have the opportunity to acquire, include:

·

A 15-year, 270,000 MTPY contract commencing in 2022; and

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·

A 15-year, 250,000 MTPY contact commencing in 2021.

Wood Pellet Production and Delivery Interruption

During September 2018, our production plant in Sampson County, North Carolina (the “Sampson plant”) and the Wilmington terminal incurred minor damage from Hurricane Florence. We undertook substantial preparation in advance of the hurricane to minimize disruption, including proactively idling operations at the Sampson plant and the Wilmington terminal. The Sampson plant and Wilmington terminal did not incur significant wind or water damage and both facilities were operational by September 30, 2018. The region experienced flooding and residual effects from the hurricane and, as a result, we expect a modest impact to our shipments from the Wilmington terminal.

Adoption of Revenue Recognition Standard

We adopted a new revenue recognition standard, Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018. Following adoption of ASC 606, our off-take contracts have continued to be classified as product sales. However, the adoption of ASC 606 impacted the basis of presentation in certain arrangements where we purchase shipments of product from third-party suppliers and resell them in back-to-back transactions to customers (“purchase and sale transactions”). Prior to the adoption of ASC 606, we reported revenue from purchase and sale transactions net of costs paid to third-party suppliers, which was classified as other revenue. Subsequent to the adoption of ASC 606, we recognize revenue on a gross basis in products sales when we determine that we act as a principal and control the wood pellets before they are transferred to the customer. Recoveries from customers for certain costs incurred at the discharge port under our off-take contracts were reported in product sales prior to the adoption of ASC 606. Under ASC 606, these recoveries are not considered a part of the transaction price, and therefore are excluded from product sales and included as an offset to cost of goods sold. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, whereas prior comparative reporting periods have not been adjusted and continue to be reported under the accounting standards in effect for such periods. We did not have a transition adjustment as a result of adopting ASC 606.

How We Generate Revenue

Product Sales

We primarily earn revenue by supplying wood pellets to our customers under off-take contracts, the majority of which are long-term in nature. Our off-take contracts are considered “take-or-pay” because they include a firm obligation of the customer to take a fixed quantity of product at a stated price and provisions that ensure we will be compensated in the case of a customer’s failure to accept all or a part of the contracted volumes or termination of a contract by a customer. Each of our long-term off-take contracts defines the annual volume of wood pellets that a customer is required to purchase and we are required to sell, the fixed price per metric ton for product 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. In addition to sales of our product under these long-term, off-take contracts, we routinely sell wood pellets under shorter-term contracts, which range in volume and tenor and, in some cases, may include only one specific shipment. Because each of our off-take contracts is a bilaterally negotiated agreement, our revenue over the duration of such contracts does not generally follow observable current market pricing trends. Our performance obligations under these contracts include the delivery of wood pellets, which are aggregated into metric tons. We account for each metric ton as a single performance obligation. Our revenue from the sale of wood pellets we produce is recognized upon satisfaction of the performance obligation when control transfers to the customer at the time of loading wood pellets onto a ship.

Depending on the specific off‑take contract, shipping terms are either Cost, Insurance and Freight (“CIF”), Cost and Freight (“CFR”) or Free On Board (“FOB”). Under a CIF contract, we procure and pay for shipping costs, which include insurance and all other charges, up to the port of destination for the customer. Under a CFR contract, we procure and pay for shipping costs, which include insurance (excluding marine cargo insurance) and all other charges, up to the port of destination for the customer. Shipping under CIF and CFR contracts after control has passed to the customer is

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considered a fulfillment activity rather than a performance obligation and associated expenses are included in the price to the customer. Under FOB contracts, the customer is directly responsible for shipping costs.

We also fulfill our contractual commitments and take advantage of dislocations in market supply and demand by entering into purchase and sale transactions (“purchase and sale transactions”). We typically are the principal in such transactions because we control the wood pellets prior to transferring them to the customer and therefore recognize related revenue on a gross basis.

Other Revenue

Other revenue includes fees from customers when they cancel, defer or accelerate a shipment.

We recognize third- and related-party terminal services revenue ratably over the contract term at our ports. Terminal services are performance obligations that are satisfied over time, as customers simultaneously receive and consume the benefits of the terminal services as we perform those services. The consideration is fixed for quantities up to the minimum in the contract. Above-minimum quantities are billed based on a per-MT rate.

Contracted Backlog

As of October 1, 2018, we had approximately $7.3 billion of product sales backlog for firm contracted product sales to our long-term off-take customers. Backlog represents the revenue to be recognized under existing contracts assuming deliveries occur as specified in the contracts. Contracted future product sales denominated in foreign currencies, excluding revenue hedged with foreign currency forward contracts, are included in U.S. Dollars at October 1, 2018 forward rates.

Our expected future product sales revenue under our contracted backlog as of October 1, 2018 is as follows (in millions):

 

 

 

 

Period from October 1, 2018 to December 31, 2018

    

$

166

Year ending December 31, 2019

 

 

651

Year ending December 31, 2020 and thereafter

 

 

6,506

Total product sales contracted backlog

 

$

7,323

 

Costs of Conducting Our Business

Cost of Goods Sold

Cost of goods sold includes the cost to produce and deliver wood pellets to our customers, reimbursable shipping-related costs associated with specific off-take contracts with CIF or CFR shipping terms and costs associated with purchase and sale transactions. The principal expenses incurred to produce and deliver our wood pellets consist of raw material, production and distribution costs.

We have strategically located our plants in the Southeastern United States, a region with plentiful wood fiber resources. We manage the supply of raw materials into our plants through a mixture of short‑term and long‑term contracts. Delivered wood fiber costs include stumpage as well as harvesting, transportation and, in some cases, size reduction services provided by our suppliers. The majority of our product volumes are sold under off-take contracts that include cost pass‑through mechanisms to mitigate increases in raw material and distribution costs.

Production costs at our production plants consist of labor, energy, tooling, repairs and maintenance and plant overhead costs. Production costs also include depreciation expense associated with the use of our plants and equipment and any gain or loss on disposal of associated assets. Some of our off‑take contracts include price escalators that mitigate inflationary pressure on certain components of our production costs. In addition to the wood pellets that we produce at our owned and operated production plants, we selectively purchase additional quantities of wood pellets from third‑ and related-party wood pellet producers.

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Distribution costs include all transportation costs from our plants to our port locations, any storage or handling costs while the product remains at port and shipping costs related to the delivery of our product from our port locations to our customers. Both the strategic location of our plants and our ownership or control of our deep‑water terminals have allowed for the efficient and cost‑effective transportation of our wood pellets. We seek to mitigate shipping risk by entering into long‑term, fixed‑price shipping contracts with reputable shippers matching the terms and volumes of our off-take contracts pursuant to which we are responsible for arranging shipping. Certain of our off‑take contracts include pricing adjustments for volatility in fuel prices, which allows us to pass the majority of fuel price‑risk associated with shipping through to our customers.

Costs associated with purchase and sale transactions are included in cost of goods sold.

Raw material, production and distribution costs associated with delivering our wood pellets to our owned and leased marine terminals and third- and related-party wood pellet purchase costs are capitalized as a component of inventory. Fixed production overhead, including the related depreciation expense, is allocated to inventory based on the normal capacity of the production plants. These costs are reflected in cost of goods sold when inventory is sold. Distribution costs associated with shipping our wood pellets to our customers and amortization of favorable acquired customer contracts are expensed as incurred. Our inventory is recorded using the first‑in, first‑out method (“FIFO”), which requires the use of judgment and estimates. Given the nature of our 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.

Recoveries from customers for certain costs incurred at the discharge port under our off-take contracts are not considered a part of the transaction price, and therefore are excluded from product sales and included as an offset to cost of goods sold.

General and Administrative Expenses

We and our General Partner are party to a Management Services Agreement (the “MSA”) with Enviva Management Company, LLC (“Enviva Management”). Under the MSA, direct or indirect internal or third‑party expenses incurred are either directly identifiable or allocated to us. Enviva Management estimates the percentage of employee salaries and related benefits, third‑party costs, office rent and expenses and any other overhead costs to be provided to us. Each month, Enviva Management allocates the actual costs accumulated in the financial accounting system using these estimates. Enviva Management also charges us for any directly identifiable costs such as goods or services provided at our request. We believe Enviva Management’s assumptions and allocations have been made on a reasonable basis and are the best estimate of the costs that we would have incurred on a stand‑alone basis.

Our unaudited condensed consolidated financial statements have been recast to reflect the contribution of our sponsor’s interest in Wilmington as if the contribution had occurred on May 15, 2013, the date Wilmington was originally organized. We do not develop plants or ports within the Partnership and therefore we do not incur startup and commissioning costs or overhead costs related to construction activities. Prior to the consummation of the Wilmington Drop‑Down, Wilmington incurred general and administrative costs related to development activities, which included startup and commissioning activities prior to beginning operations as well as incremental overhead costs related to construction activities. We do not expect to incur these costs going forward.

How We Evaluate Our Operations

Adjusted Gross Margin per Metric Ton

We use adjusted gross margin per metric ton to measure our financial performance. We define adjusted gross margin as gross margin excluding asset disposals, depreciation and amortization and changes in unrealized derivative instruments related to hedged items included in gross margin. We believe adjusted gross margin per metric ton is a meaningful measure because it compares our revenue‑generating activities to our operating costs for a view of profitability and performance on a per metric ton basis. Adjusted gross margin per metric ton will primarily be affected by our ability to meet targeted production volumes and to control direct and indirect costs associated with procurement and delivery of wood fiber to our production plants and the production and distribution of wood pellets.

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Adjusted EBITDA

We view adjusted EBITDA as an important indicator of our financial performance. We define adjusted EBITDA as net income or loss excluding depreciation and amortization, interest expense, income tax expense, early retirement of debt obligations, non‑cash unit compensation expense, asset impairments and disposals, changes in unrealized derivative instruments related to hedged items included in gross margin and other income and (expense), and certain items of income or loss that we characterize as unrepresentative of our ongoing operations including certain expenses incurred related to the Chesapeake Incident (consisting of emergency response expenses, expenses related to the disposal of inventory, and asset disposal and repair costs, offset by insurance recoveries received). Adjusted EBITDA is a supplemental measure used by our management and other users of our financial statements, such as investors, commercial banks and research analysts, to assess the financial performance of our assets without regard to financing methods or capital structure.

Distributable Cash Flow

We define distributable cash flow as adjusted EBITDA less maintenance capital expenditures and interest expense net of amortization of debt issuance costs, debt premium, original issue discounts and the impact from incremental borrowings related to the Chesapeake Incident. We use distributable cash flow as a performance metric to compare the cash‑generating performance of the Partnership from period to period and to compare the cash‑generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. We do not rely on distributable cash flow as a liquidity measure.

Non‑GAAP Financial Measures

Adjusted gross margin per metric ton, adjusted EBITDA and distributable cash flow are not financial measures presented in accordance with accounting principles generally accepted in the United States (“GAAP”). We believe that the presentation of these non‑GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations. Our non‑GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non‑GAAP financial measures has important limitations as an analytical tool because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider adjusted gross margin per metric ton, adjusted EBITDA or distributable cash flow in isolation or as substitutes for analysis of our results as reported under GAAP. Our definitions of these non‑GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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The following tables present a reconciliation of each of adjusted gross margin per metric ton, adjusted EBITDA and distributable cash flow to the most directly comparable GAAP financial measure for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017 (Recast)

    

2018

    

2017 (Recast)

 

 

 

(in thousands, except per metric ton)

 

Reconciliation of gross margin to adjusted gross margin per metric ton:

 

 

 

 

 

 

 

 

 

 

 

 

 

Metric tons sold

 

 

762

 

 

668

 

 

2,109

 

 

1,919

 

Gross margin

 

$

30,119

 

$

20,382

 

$

44,912

 

$

53,081

 

Loss on disposal of assets

 

 

656

 

 

1,237

 

 

900

 

 

3,242

 

Depreciation and amortization

 

 

9,678

 

 

9,707

 

 

28,800

 

 

29,104

 

Changes in unrealized derivative instruments

 

 

1,944

 

 

 —

 

 

(750)

 

 

 —

 

Adjusted gross margin

 

$

42,397

 

$

31,326

 

$

73,862

 

$

85,427

 

Adjusted gross margin per metric ton

 

$

55.64

 

$

46.90

 

$

35.02

 

$

44.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30,

    

September 30,

 

 

 

2018

 

2017 (Recast)

 

2018

    

2017 (Recast)

 

 

 

(in thousands)

 

Reconciliation of adjusted EBITDA and distributable cash flow to net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13,356

 

$

5,023

 

$

(2,435)

 

$

6,475

 

Add:

 

 

 

 

 

  

 

 

 

 

 

  

 

Depreciation and amortization

 

 

9,801

 

 

9,709

 

 

29,240

 

 

29,115

 

Interest expense

 

 

9,445

 

 

7,653

 

 

27,137

 

 

23,070

 

Non-cash unit compensation expense

 

 

1,781

 

 

1,833

 

 

5,604

 

 

5,113

 

Asset impairments and disposals

 

 

656

 

 

1,237

 

 

900

 

 

3,242

 

Changes in unrealized derivative instruments

 

 

1,944

 

 

 —

 

 

(750)

 

 

 —

 

Chesapeake Incident, net

 

 

(6,787)

 

 

 —

 

 

8,999

 

 

 —

 

Transaction expenses

 

 

30

 

 

344

 

 

176

 

 

3,427

 

Adjusted EBITDA

 

 

30,226

 

 

25,799

 

 

68,871

 

 

70,442

 

Less:

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense, net of amortization of debt issuance costs, debt premium costs, original issue discount and impact from incremental borrowings related to Chesapeake Incident

 

 

7,839

 

 

7,261

 

 

24,984

 

 

21,909

 

Maintenance capital expenditures

 

 

1,638

 

 

857

 

 

3,252

 

 

2,870

 

Distributable cash flow attributable to Enviva Partners, LP

 

 

20,749

 

 

17,681

 

 

40,635

 

 

45,663

 

Less: Distributable cash flow attributable to incentive distribution rights

 

 

1,532

 

 

1,063

 

 

4,196

 

 

2,269

 

Distributable cash flow attributable to Enviva Partners, LP limited partners

 

$

19,217

 

$

16,618

 

$

36,439

 

$

43,394

 

 

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Results of Operations

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

    

September 30,

    

 

    

 

 

2018

    

2017 (Recast)

 

Change

 

 

 

(in thousands)

 

Product sales

 

$

142,541

 

$

125,422

 

$

17,119

 

Other revenue (1)

 

 

1,607

 

 

6,801

 

 

(5,194)

 

Net revenue

 

 

144,148

 

 

132,223

 

 

11,925

 

Cost of goods sold (1)

 

 

103,695

 

 

100,897

 

 

2,798

 

Loss on disposal of assets

 

 

656

 

 

1,237

 

 

(581)

 

Depreciation and amortization

 

 

9,678

 

 

9,707

 

 

(29)

 

Total cost of goods sold

 

 

114,029

 

 

111,841

 

 

2,188

 

Gross margin

 

 

30,119

 

 

20,382

 

 

9,737

 

General and administrative expenses (1)

 

 

7,315

 

 

7,704

 

 

(389)

 

Income from operations

 

 

22,804

 

 

12,678

 

 

10,126

 

Interest expense

 

 

(9,445)

 

 

(7,653)

 

 

1,792

 

Other income (expense)

 

 

(3)

 

 

(2)

 

 

 1

 

Net income

 

 

13,356

 

 

5,023

 

 

8,333

 

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

665

 

 

(665)

 

Net income attributable to Enviva Partners, LP

 

$

13,356

 

$

5,688

 

$

7,668

 

 (1) See Note 12, Related-Party Transactions

 

 

 

 

 

 

 

 

 

 

 

Product sales

Revenue related to product sales for wood pellets produced or procured by us increased to $142.5 million for the three months ended September 30, 2018 from $125.4 million for the three months ended September 30, 2017. The $17.1 million, or 14%, increase was primarily attributable to a 14% increase in sales volumes during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The increase in product sales was partially offset by a decrease in pricing during the three months ended September 30, 2018 due primarily to customer contract mix.

Other revenue

Other revenue decreased by $5.2 million during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease is primarily attributable to $2.2 million in fees received from customers requesting scheduling accommodations and $3.2 million related to purchase and sale transactions during the three months ended September 30, 2017. We did not receive fees for scheduling accommodations during the three months ended September 30, 2018.

Cost of goods sold

Cost of goods sold increased to $114.0 million for the three months ended September 30, 2018 from $111.8 million for the three months ended September 30, 2017. The $2.2 million, or 2%, increase was primarily attributable to a 14% increase in sales volumes during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The increase was partially offset by insurance recoveries related to the Chesapeake Incident. We incurred $9.7 million in expenses related to the Chesapeake Incident during the three months ended September 30, 2018, offset by $21.8 million of insurance recoveries.

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Gross margin

Gross margin increased to $30.1 million for the three months ended September 30, 2018 from $20.4 million for the three months ended September 30, 2017. Gross margin was impacted by the following factors during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017:

·

Insurance recoveries, in excess of expenses incurred, related to the Chesapeake Incident increased gross margin by $12.2 million.

·

A 14% increase in sales volumes increased gross margin by $3.5 million.

·

Lower loss on asset disposals increased gross margin by $0.6 million.

Offsetting the above were:

·

A $5.2 million decrease in other revenue as described above.

·

Higher costs during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, including wood pellets sourced from third- and related-party wood pellet producers, decreased gross margin by $0.8 million.

·

Lower pricing due to customer contract mix, partially offset by changes in unrealized derivative instruments (see Note 9, Derivative Instruments), decreased gross margin by $0.6 million.

Adjusted gross margin per metric ton

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

    

2018

    

2017 (Recast)

    

Change

    

 

 

(in thousands except per metric ton)

 

Metric tons sold

 

 

762

 

 

668

 

 

94

 

Gross margin

 

$

30,119

 

$

20,382

 

$

9,737

 

Loss on disposal of assets

 

 

656

 

 

1,237

 

 

(581)

 

Depreciation and amortization

 

 

9,678

 

 

9,707

 

 

(29)

 

Changes in unrealized derivative instruments

 

 

1,944

 

 

 —

 

 

1,944

 

Adjusted gross margin

 

$

42,397

 

$

31,326

 

$

11,071

 

Adjusted gross margin per metric ton

 

$

55.64

 

$

46.90

 

$

8.74

 

 

We earned an adjusted gross margin of $42.4 million, or $55.64 per MT, for the three months ended September 30, 2018. Excluding the costs and recoveries associated with the Chesapeake Incident, we would have earned adjusted gross margin of $30.2 million, or $39.70 per MT. Adjusted gross margin was $31.3 million, or $46.90 per MT, for the three months ended September 30, 2017. Adjusting for the impact of ASC 606 for comparison purposes, adjusted gross margin per metric ton would have been $43.33 per MT for the three months ended September 30, 2017. The factors impacting the change in adjusted gross margin are described above under the heading “Gross margin.”

General and administrative expenses

General and administrative expenses were $7.3 million for the three months ended September 30, 2018 and $7.7 million for the three months ended September 30, 2017.

During the three months ended September 30, 2018, general and administrative expenses included allocated expenses of $4.0 million that were incurred under the MSA, $1.5 million of direct expenses and $1.8 million of non‑cash unit compensation expense associated with unit‑based awards under the Enviva Partners, LP Long-Term Incentive Plan (the “LTIP”).

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During the three months ended September 30, 2017, general and administrative expenses included allocated expenses of $3.7 million that were incurred under the MSA, $1.7 million of direct expenses, $1.8 million of non-cash unit compensation associated with unit-based awards under the LTIP and $0.5 million of expenses associated with the cessation of operations of at one of our former wood pellet production plants and other costs.

Interest expense

We incurred $9.4 million of interest expense during the three months ended September 30, 2018 and $7.7 million of interest expense during the three months ended September 30, 2017. The increase in interest expense was primarily attributable to revolver borrowings to fund timing differences between expenses incurred and insurance recoveries received related to the Chesapeake Incident. Interest expense also increased due to the incremental interest payable on our senior notes issued primarily to fund the Wilmington Drop-Down.

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

    

2018

    

2017 (Recast)

    

Change

    

 

 

(in thousands)

 

Reconciliation of adjusted EBITDA to net loss:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,356

 

$

5,023

 

$

8,333

 

Add:

 

 

 

 

 

 

 

 

  

 

Depreciation and amortization

 

 

9,801

 

 

9,709

 

 

92

 

Interest expense

 

 

9,445

 

 

7,653

 

 

1,792

 

Non-cash unit compensation expense

 

 

1,781

 

 

1,833

 

 

(52)

 

Asset impairments and disposals

 

 

656

 

 

1,237

 

 

(581)

 

Changes in unrealized derivative instruments

 

 

1,944

 

 

 —

 

 

1,944

 

Chesapeake Incident, net

 

 

(6,787)

 

 

 —

 

 

(6,787)

 

Transaction expenses

 

 

30

 

 

344

 

 

(314)

 

Adjusted EBITDA

 

$

30,226

 

$

25,799

 

$

4,427

 

 

We generated adjusted EBITDA of $30.2 million for the three months ended September 30, 2018 compared to adjusted EBITDA of $25.8 million for the three months ended September 30, 2017. The $4.4 million increase was primarily attributable to the factors described above under the heading “Gross margin,” including the $6.1 million of expenses incurred, net of insurance recoveries of $11.4 million, related to business continuity activities following the Chesapeake Incident. Excluding the costs and recoveries associated with the Chesapeake Incident, we would have earned Adjusted EBITDA of $24.8 million during the three months ended September 30, 2018.

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Distributable Cash Flow

The following is a reconciliation of adjusted EBITDA to distributable cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

September 30,

 

 

 

 

    

2018

    

2017 (Recast)

    

Change

 

 

(in thousands)

Adjusted EBITDA

 

$

30,226

 

$

25,799

 

$

4,427

Less:

 

 

 

 

 

 

 

 

  

Interest expense, net of amortization of debt issuance costs, debt premium costs, original issue discount and impact from incremental borrowings related to Chesapeake Incident

 

 

7,839

 

 

7,261

 

 

578

Maintenance capital expenditures

 

 

1,638

 

 

857

 

 

781

Distributable cash flow attributable to Enviva Partners, LP

 

 

20,749

 

 

17,681

 

 

3,068

Less: Distributable cash flow attributable to incentive distribution rights

 

 

1,532

 

 

1,063

 

 

469

Distributable cash flow attributable to Enviva Partners, LP limited partners

 

$

19,217

 

$

16,618

 

$

2,599

 

Nine months Ended September 30, 2018 Compared to Nine months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

    

September 30,

    

 

    

 

 

2018

    

2017 (Recast)

    

Change

 

 

 

(in thousands)

 

Product sales

 

$

398,031

 

$

366,142

 

$

31,889

 

Other revenue (1)

 

 

7,037

 

 

16,071

 

 

(9,034)

 

Net revenue

 

 

405,068

 

 

382,213

 

 

22,855

 

Cost of goods sold (1)

 

 

330,456

 

 

296,786

 

 

33,670

 

Loss on disposal of assets

 

 

900

 

 

3,242

 

 

(2,342)

 

Depreciation and amortization

 

 

28,800

 

 

29,104

 

 

(304)

 

Total cost of goods sold

 

 

360,156

 

 

329,132

 

 

31,024

 

Gross margin

 

 

44,912

 

 

53,081

 

 

(8,169)

 

General and administrative expenses (1)

 

 

21,406

 

 

23,337

 

 

(1,931)

 

Income from operations

 

 

23,506

 

 

29,744

 

 

(6,238)

 

Interest expense

 

 

(27,137)

 

 

(23,070)

 

 

4,067

 

Other income (expense)

 

 

1,196

 

 

(199)

 

 

(1,395)

 

Net (loss) income

 

 

(2,435)

 

 

6,475

 

 

(8,910)

 

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

3,180

 

 

(3,180)

 

Net (loss) income attributable to Enviva Partners, LP

 

$

(2,435)

 

$

9,655

 

$

(12,090)

 

 (1) See Note 12, Related-Party Transactions

 

 

 

 

 

 

 

 

 

 

 

Product sales

Revenue related to product sales for wood pellets produced or procured by us increased to $398.0 million for the nine months ended September 30, 2018 from $366.1 million for the nine months ended September 30, 2017. The $31.9 million, or 9%, increase was primarily attributable to a 10% increase in sales volumes partially offset by a decrease in pricing due primarily to customer contract mix. The increase in product sales is also attributable to the adoption of ASC 606 (see Note 2, Significant Accounting Policies).

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Other revenue

Other revenue decreased by $9.0 million during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The change was primarily driven by $7.7 million of purchase and sale transactions during the nine months ended September 30, 2017 recorded in other revenue prior to the adoption of ASC 606 (see Note 2, Significant Accounting Policies).

Cost of goods sold

Cost of goods sold increased to $360.1 million for the nine months ended September 30, 2018 from $329.1 million for the nine months ended September 30, 2017. The $31.0 million increase was primarily attributable to $10.3 million in expenses, net of insurance recoveries related to the Chesapeake Incident, an increase in our sales volumes and $10.1 million attributable to the adoption of ASC 606 (see Note 2, Significant Accounting Policies).

Gross margin

Gross margin was $44.9 million for the nine months ended September 30, 2018 and $53.1 million for the nine months ended September 30, 2017. The $8.2 million decrease in gross margin was primarily attributable to the following:

·

Expenses incurred related to the Chesapeake Incident decreased gross margin by $10.3 million. During the nine months ended September 30, 2018, we incurred $25.7 million of costs, offset by $24.4 million of insurance recoveries, related to business continuity activities. The Chesapeake Incident also resulted in $12.9 million of emergency response expenses, $9.1 million of asset disposal and repair costs, partially offset by $15.7 million of insurance recoveries, and $10.7 million related to the disposal of approximately 43,000 MT of inventory, partially offset by $8.0 million of cargo insurance recoveries.  

·

A $9.0 million decrease in other revenue as described above.

·

Lower pricing due to customer contract mix, partially offset by changes in unrealized derivative instruments (see Note 9, Derivative Instruments), decreased gross margin by $0.7 million.

Offsetting the above were:

·

An increase in sales volumes increased gross margin by $5.0 million. Adjusting for the impact of ASC 606, we would have sold 2,049,000 MT during the nine months ended September 30, 2018, or approximately 130,000 MT more than the comparable prior-year period.

·

Lower production costs of our wood pellets, primarily from increased plant utilization and decreases in other costs, increased gross margin by $3.4 million.

·

Lower loss on asset disposals increased gross margin by $2.4 million.

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Adjusted gross margin per metric ton

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

    

September 30,

 

 

 

    

 

 

2018

    

2017 (Recast)

    

Change

 

 

 

(in thousands except per metric ton)

 

Metric tons sold

 

 

2,109

 

 

1,919

 

 

190

 

Gross margin

 

$

44,912

 

$

53,081

 

$

(8,169)

 

Loss on disposal of assets

 

 

900

 

 

3,242

 

 

(2,342)

 

Depreciation and amortization

 

 

28,800

 

 

29,104

 

 

(304)

 

Changes in unrealized derivative instruments

 

 

(750)

 

 

 —

 

 

(750)

 

Adjusted gross margin

 

$

73,862

 

$

85,427

 

$

(11,565)

 

Adjusted gross margin per metric ton

 

$

35.02

 

$

44.52

 

$

(9.50)

 

 

We earned an adjusted gross margin of $73.9 million, or $35.02 per MT, for the nine months ended September 30, 2018. Excluding the costs and recoveries associated with the Chesapeake Incident, we would have earned adjusted gross margin of $84.1 million, or $39.88 per MT. Adjusted gross margin was $85.4 million, or $44.52 per MT, for the nine months ended September 30, 2017. Adjusting for the impact of ASC 606 for comparison purposes, adjusted gross margin per metric ton would have been $41.47 per MT for the nine months ended September 30, 2017. The factors impacting the change in adjusted gross margin are described above under the heading “Gross margin.”

General and administrative expenses

General and administrative expenses were $21.4 million for the nine months ended September 30, 2018 and $23.3 million for the nine months ended September 30, 2017.

During the nine months ended September 30, 2018, general and administrative expenses included allocated expenses of $11.4 million that were incurred under the MSA, $4.4 million of direct and other expenses and $5.6 million of non‑cash unit compensation expense associated with the grant of unit‑based awards under the LTIP.

During the nine months ended September 30, 2017, general and administrative expenses included allocated expenses of $9.7 million that were incurred under the MSA, $4.8 million of direct and other expenses, $5.1 million of non-cash unit compensation associated with unit-based awards under the LTIP, $1.8 million related to transaction expenses on consummated and unconsummated transactions and $1.9 million of expenses associated with the cessation of operations of the wood pellet production plant owned by Wiggins and other costs.

Interest expense

We incurred $27.1 million of interest expense during the nine months ended September 30, 2018 and $23.1 million of interest expense during the nine months ended September 30, 2017. The increase in interest expense was primarily attributable to the incremental interest payable on our senior notes issued primarily to fund the Wilmington Drop-Down. We also incurred $1.3 million in interest expense on revolver borrowings to fund timing differences between expenses incurred and insurance recoveries received related to the Chesapeake Incident.

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Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

    

September 30,

 

 

 

    

 

 

2018

    

2017 (Recast)

    

Change

 

 

 

(in thousands)

 

Reconciliation of adjusted EBITDA to net (loss) income:

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,435)

 

$

6,475

 

$

(8,910)

 

Add:

 

 

 

 

 

 

 

 

  

 

Depreciation and amortization

 

 

29,240

 

 

29,115

 

 

125

 

Interest expense

 

 

27,137

 

 

23,070

 

 

4,067

 

Non-cash unit compensation expense

 

 

5,604

 

 

5,113

 

 

491

 

Asset impairments and disposals

 

 

900

 

 

3,242

 

 

(2,342)

 

Changes in unrealized derivative instruments

 

 

(750)

 

 

 —

 

 

(750)

 

Chesapeake Incident, net

 

 

8,999

 

 

 —

 

 

8,999

 

Transaction expenses

 

 

176

 

 

3,427

 

 

(3,251)

 

Adjusted EBITDA

 

$

68,871

 

$

70,442

 

$

(1,571)

 

 

We generated adjusted EBITDA of $68.9 million for the nine months ended September 30, 2018 compared to $70.4 million for the nine months ended September 30, 2017. The $1.6 million decrease was primarily attributable to the factors described above under the heading “Gross margin,” including the expenses incurred, net of insurance recoveries, related to business continuity activities following the Chesapeake Incident. Excluding the costs and recoveries associated with the Chesapeake Incident, we would have earned adjusted EBITDA of $70.1 million during the nine months ended September 30, 2018.

Distributable Cash Flow

The following is a reconciliation of adjusted EBITDA to distributable cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

    

September 30,

    

 

 

    

 

 

2018

    

2017 (Recast)

 

Change

 

 

 

(in thousands)

 

Adjusted EBITDA

 

$

68,871

 

$

70,442

 

$

(1,571)

 

Less:

 

 

 

 

 

 

 

 

  

 

Interest expense, net of amortization of debt issuance costs, debt premium costs, original issue discount and impact from incremental borrowings related to Chesapeake Incident

 

 

24,984

 

 

21,909

 

 

3,075

 

Maintenance capital expenditures

 

 

3,252

 

 

2,870

 

 

382

 

Distributable cash flow to Enviva Partners, LP limited partners

 

 

40,635

 

 

45,663

 

 

(5,028)

 

Less: Distributable cash flow attributable to incentive distribution rights

 

 

4,196

 

 

2,269

 

 

1,927

 

Distributable cash flow attributable to Enviva Partners, LP limited partners

 

$

36,439

 

$

43,394

 

$

(6,955)

 

 

Liquidity and Capital Resources

Our primary sources of liquidity include cash and cash equivalent balances, cash generated from operations, borrowings under our revolving credit commitments and, from time to time, debt and equity offerings. Our primary liquidity requirements are to fund working capital, service our debt, maintain cash reserves, finance plant acquisitions and plant expansion projects, finance maintenance capital expenditures and pay distributions. We believe cash on hand, cash generated from our operations and the availability of our revolving credit commitments will be sufficient to meet our primary liquidity requirements. However, future capital expenditures and other cash requirements could be higher

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than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control.

Amended and Restated Credit Agreement

We amended the credit agreement governing our senior secured credit facilities in September 2018, to increase the maximum allowable ratio of total debt to consolidated EBITDA (the “Total Leverage Ratio”) to 4.75:1.00 as of the end of each quarter prior to maturity. Prior to the amendment, the Total Leverage Ratio was at 4.00:1.00 and was scheduled to decrease to 3.75:1.00 beginning with the quarter ending December 31, 2018 through maturity.

As of September 30, 2018 and December 31, 2017, we were in compliance with all covenants and restrictions associated with, and no events of default existed under, our senior secured credit facilities. Our obligations under the senior secured credit facilities are guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets.

In October 2018, we amended and restated the revolving credit commitments under the senior secured credit facilities, increasing the revolving commitments from $100.0 million to $350.0 million and extending the maturity from April 2020 to October 2023. We used $41.2 million of the revolving credit commitments to fully repay the outstanding amounts on the Tranche A-1 and A-3 borrowings under the senior secured credit facilities.

Cash Distributions

To the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, our minimum quarterly distribution is $0.4125 per common and subordinated unit per quarter, which equates to approximately $10.9 million per quarter, or approximately $43.7 million per year, based on the number of common units outstanding as of September 30, 2018.

Capital Requirements

We operate in a capital‑intensive industry, which requires significant investments to maintain and upgrade existing capital. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:

·

Maintenance capital expenditures, which are cash expenditures incurred to maintain our long-term operating income or operating capacity. These expenditures typically include certain system integrity, compliance and safety improvements; and

·

Growth capital expenditures, which are cash expenditures we expect will increase our operating income or operating capacity over the long-term. Growth capital expenditures include acquisitions or construction of new capital assets or capital improvements such as additions to or improvements on our existing capital assets as well as projects intended to extend the useful life of assets.

The classification of capital expenditures as either maintenance or growth is made at the individual asset level during our budgeting process and as we approve, execute and monitor our capital spending.

During 2019, we expect to increase the aggregate production capacity of our wood pellet production plants in Northampton, North Carolina and Southampton, Virginia by approximately 400,000 MTPY, subject to receiving the necessary permits. We expect to invest approximately $130.0 million in additional production assets and emissions control equipment for the expansions. We expect to complete construction in early 2020 with startup shortly thereafter.

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Cash Flows

The following table sets forth a summary of our net cash flows from operating, investing and financing activities for the nine months ended September 30, 2018 and 2017, respectively:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 30,

    

 

 

2018

    

2017 (Recast)

 

 

 

(in thousands)

 

Net cash provided by operating activities

 

$

70,131

 

$

74,031

 

Net cash used in investing activities

 

 

(14,904)

 

 

(21,916)

 

Net cash used in financing activities

 

 

(54,888)

 

 

(43,128)

 

Net increase in cash and cash equivalents

 

$

339

 

$

8,987

 

 

Cash Provided by Operating Activities

Net cash provided by operating activities was $70.1 million for the nine months ended September 30, 2018 compared to $74.0 million for the nine months ended September 30, 2017. The decrease of $3.9 million was primarily attributable to the following:

·

A decrease in net income, excluding depreciation and amortization, of $8.8 million during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease in net income, excluding depreciation and amortization, is primarily attributable to the Chesapeake Incident (see Note 6, Inventory Impairment and Asset Disposal).

·

A $5.3 million decrease in cash flows provided by operating activities related to an increase in inventories during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase during the nine months ended September 30, 2018 was primarily attributable to the timing and size of product shipments.

Offsetting the above was:

·

A $5.2 million increase in cash flows provided by operating activities related to a decrease in accounts receivable and related-party receivables during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This increase during the nine months ended September 30, 2018 was primarily attributable to the timing, volume and size of product shipments.

·

A $7.1 million increase in cash flows provided by operating activities related to an increase in accounts payable, related-party payables, accrued liabilities and other current liabilities during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase during the nine months ended September 30, 2018 was primarily attributable to accrued expenses associated with the Chesapeake Incident and the timing of payments for wood pellets purchased from a related party.

Cash Used in Investing Activities

Net cash used in investing activities was $14.9 million for the nine months ended September 30, 2018 compared to $21.9 million for the nine months ended September 30, 2017. The nine months ended September 30, 2017 include purchases of property, plant and equipment related to the completion of both the Sampson plant and the Wilmington terminal. The $14.9 million of cash used for property, plant and equipment during the nine months ended September 30, 2018 includes approximately $8.8 million related to projects intended to increase the operating income or operating capacity of our plants, $3.3 million of capital expenditures to maintain operations and $3.9 million of capital expenditures associated with the rebuilding of the Chesapeake terminal, offset by $1.1 million of insurance recoveries received.

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Cash Used in Financing Activities

Net cash used in financing activities was $54.9 million for the nine months ended September 30, 2018 compared to net cash used in financing activities of $43.1 million for the nine months ended September 30, 2017. Net cash used in financing activities for the nine months ended September 30, 2018 primarily consisted of $55.2 million of distributions paid to our unitholders, $2.3 million paid to the General Partner to purchase common units underlying certain performance-based phantom units that vested under the LTIP (see Note 14, Equity-Based Awards) and  $4.4 million paid to satisfy the withholding tax requirements associated with such LTIP vesting. The net cash used in financing activities was offset by $11.5 million of revolver borrowings, net, during the nine months ended September 30, 2018.

Net cash used in financing activities for the nine months ended September 30, 2017 primarily consisted of $46.3 million of distributions paid to our unitholders and $9.9 million of repayments for our debt and capital lease obligations, offset by $10.0 million in capital contributions made by the First Hancock JV prior to the Wilmington Drop-Down.

Off‑Balance Sheet Arrangements

As of September 30, 2018, we did not have any off‑balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. We provide expanded discussion of our significant accounting policies, estimates and judgments in our 2017 Form 10‑K. We believe these accounting policies reflect our significant estimates and assumptions used in preparation of our financial statements. There have been no significant changes to our critical accounting policies and estimates since December 31, 2017  except for the adoption of ASC 606. The adoption changed the Partnership’s accounting policies for revenue recognition and cost of goods sold. For changes in our accounting policy for revenue recognition, see Note 2, Significant Accounting Policies. As a result of the adoption of ASC 606, our accounting policy for cost of goods sold now includes costs associated with purchase and sale transactions.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our exposure to market risk as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 other than as described below:

Foreign Currency Exchange Risk

We primarily are exposed to fluctuations in foreign currency exchange rates related to contracts pursuant to which deliveries of wood pellets will be settled in foreign currency. We have entered into forward contracts and purchased options to hedge a portion of our forecasted revenue for these customer contracts.

As of September 30, 2018, we had notional amounts of 45.6 million GBP and 14.3 million EUR under foreign currency forward contracts and 39.4 million GBP and 1.7 million EUR under foreign currency purchased options that expire between 2018 and 2023. During the third quarter of 2018, we elected to discontinue hedge accounting for all designated foreign currency cash flow hedges and, as a result, we had no unrealized loss (gain) associated with foreign currency forward contracts and foreign currency purchased options in accumulated other comprehensive income.

We do not utilize foreign exchange contracts for speculative or trading purposes. The counterparties to our foreign exchange contracts are major financial institutions.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)‑15(e) and 15(d)‑15(e) under the Securities Exchange Act of 1934, as amended) was carried out under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of our General Partner. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of our General Partner concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1.  Legal Proceedings

There have been no material changes with respect to the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 1A.  Risk Factors

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

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Item 6.  Exhibits

The information required by this Item 6 is set forth in the Exhibit Index accompanying this Quarterly Report on Form 10‑Q and is incorporated herein by reference.

 

Exhibit Index

 

 

 

 

Exhibit
Number

    

Description

 

 

 

 

 

3.1

 

Certificate of Limited Partnership of Enviva Partners, LP (Exhibit 3.1, Form S‑1 Registration Statement filed October 28, 2014, File No. 333‑199625)

 

3.2

 

First Amended and Restated Agreement of Limited Partnership of Enviva Partners, LP, dated May 4, 2015, by Enviva Partners GP, LLC (Exhibit 3.1, Form 8‑K filed May 4, 2015, File No. 001‑37363)

 

3.3

 

Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Enviva Partners, LP, effective as of December 18, 2017, by Enviva Partners GP, LLC (Exhibit 3.1, Form 8-K filed December 21, 2017, File No. 001-37363)

 

10.1

 

Third Amendment to Credit Agreement (Exhibit 10.1, Form 8-K filed September 17, 2018, File No. 001-37363)

 

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

 

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

 

32.1**

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

 

101.INS*

 

XBRL Instance Document

 

101.SCH*

 

XBRL Schema Document

 

101.CAL*

 

XBRL Calculation Linkbase Document

 

101.DEF*

 

XBRL Definition Linkbase Document

 

101.LAB*

 

XBRL Labels Linkbase Document

 

101.PRE*

 

XBRL Presentation Linkbase Document

 

 

 

 

 


*     Filed herewith.

**   Furnished herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 8, 2018

 

 

 

 

 

ENVIVA PARTNERS, LP

 

 

 

 

By:

Enviva Partners GP, LLC, its general partner

 

 

 

 

 

 

 

By:

/s/ Shai Even

 

 

Name:

Shai Even

 

 

Title:

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

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