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Enviva Inc. - Quarter Report: 2019 June (Form 10-Q)

 
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 June 30, 2019
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
(State or other jurisdiction
of incorporation or organization)
46-4097730
(I.R.S. Employer
Identification No.)
7200 Wisconsin Ave, Suite 1000
Bethesda, MD
(Address of principal executive offices)
20814
(Zip code)
(301) 657-5560
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Units
EVA
New York Stock Exchange
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, a 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 July 31, 2019, 33,456,811 common units were outstanding.
 


Table of Contents

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

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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;
our inability to successfully execute our project development and construction activities on time and within budget;
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, disruptions in supply or 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 and joint ventures, 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;
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 timely acquire or maintain necessary permits or rights for our production, transportation or terminaling operations as well as expenditures associated therewith;
changes in the price and availability of transportation;
changes in foreign currency exchange rates 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;
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;

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our inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets;
the effects of the anticipated exit of the United Kingdom from the European Union on our and our customers’ businesses; and
our inability 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, 2018. 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.
dry-bulk: describes dry-bulk commodities that are shipped in large, unpackaged amounts.
metric ton: one metric ton, which is equivalent to 1,000 kilograms and 1.1023 short tons.
net calorific value: commonly used in the power industry as the means of expressing fuel energy.
off-take contract: an agreement concerning the purchase and sale of a certain volume of a given resource such as wood pellets.
ramp: increasing production for a period of time following the startup of a plant or completion of a project.
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)
 
 
June 30,
2019
 
December 31,
2018
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
5,005

 
$
2,460

Accounts receivable
 
61,818

 
54,794

Insurance receivables
 
2,258

 
5,140

Related-party receivables
 
5,687

 
1,392

Inventories
 
31,292

 
31,490

Prepaid expenses and other current assets
 
3,069

 
2,235

Total current assets
 
109,129

 
97,511

 
 
 
 
 
Property, plant and equipment - in service, net
 
525,474

 
542,635

Construction in progress
 
198,616

 
14,393

Total property, plant and equipment, net
 
724,090

 
557,028

 
 
 
 
 
Operating lease right-of-use assets, net
 
33,877

 

Goodwill
 
85,615

 
85,615

Other long-term assets
 
6,858

 
8,616

Total assets
 
$
959,569

 
$
748,770

 
 
 
 
 
Liabilities and Partners’ Capital
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
15,648

 
$
15,551

Related-party payables and accrued liabilities
 
29,473

 
28,225

Deferred consideration for drop-downs due to related party
 
40,000

 
74,000

Accrued and other current liabilities
 
52,788

 
41,400

Current portion of interest payable
 
5,512

 
5,434

Current portion of long-term debt and finance lease obligations
 
2,733

 
2,722

Total current liabilities
 
146,154

 
167,332

Long-term debt and finance lease obligations
 
523,348

 
429,933

Long-term operating lease liabilities
 
33,849

 

Long-term interest payable
 
1,070

 
1,010

Other long-term liabilities
 
1,991

 
3,779

Total liabilities
 
706,412

 
602,054

Commitments and contingencies
 

 

 
 
 
 
 
Partners’ capital:
 
 
 
 
Limited partners:
 
 
 
 
Common unitholders—public (19,870,436 and 14,573,452 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
 
323,883

 
207,612

Common unitholder—sponsor (13,586,375 and 11,905,138 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
 
98,785

 
72,352

General partner (no outstanding units)
 
(121,422
)
 
(133,687
)
Accumulated other comprehensive income
 
103

 
439

Total Enviva Partners, LP partners' capital
 
301,349

 
146,716

Noncontrolling interest
 
(48,192
)
 

Total partners’ capital
 
253,157

 
146,716

Total liabilities and partners’ capital
 
$
959,569

 
$
748,770

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 June 30,
 
Six Months ended June 30,
 
2019
 
2018
 
2019
 
2018
Product sales
$
167,202

 
$
133,168

 
$
323,801

 
$
255,490

Other revenue (1)
877

 
2,428

 
2,647

 
5,430

Net revenue
168,079

 
135,596

 
326,448

 
260,920

Cost of goods sold (1)
140,476

 
105,967

 
277,868

 
227,005

Depreciation and amortization
11,096

 
9,818

 
22,166

 
19,122

Total cost of goods sold
151,572

 
115,785

 
300,034

 
246,127

Gross margin
16,507

 
19,811

 
26,414

 
14,793

General and administrative expenses
2,241

 
3,829

 
7,865

 
6,577

Related-party management services agreement fee
8,789

 
3,458

 
13,002

 
7,514

Total general and administrative expenses
11,030

 
7,287

 
20,867

 
14,091

Income from operations
5,477

 
12,524

 
5,547

 
702

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(9,196
)
 
(9,047
)
 
(18,829
)
 
(17,692
)
Other (expense) income, net
(82
)
 
67

 
558

 
1,199

Total other expense, net
(9,278
)
 
(8,980
)
 
(18,271
)
 
(16,493
)
Net (loss) income
$
(3,801
)
 
$
3,544

 
$
(12,724
)
 
$
(15,791
)
Net (loss) income per limited partner common unit:
 
 
 
 
 
 
 
Basic and diluted
$
(0.20
)
 
$
0.08

 
$
(0.59
)
 
$
(0.70
)
Net (loss) income per limited partner subordinated unit:
 
 
 
 
 
 
 
Basic and diluted
$

 
$
0.08

 
$

 
$
(0.70
)
Weighted-average number of limited partner units outstanding:
 
 
 
 
 
 
 
Common—basic
33,400

 
18,597

 
30,098

 
16,518

Common—diluted
33,400

 
19,728

 
30,098

 
16,518

Subordinated—basic and diluted

 
7,804

 

 
9,855

 
 
 
 
 
 
 
 
(1) See Note 13, 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 (Loss) Income
(In thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(3,801
)
 
$
3,544

 
$
(12,724
)
 
$
(15,791
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net unrealized (losses) gains on cash flow hedges
(106
)
 
4,365

 
(161
)
 
3,037

Reclassification of net gains realized into net (loss) income
(86
)
 
(64
)
 
(193
)
 
(63
)
Total other comprehensive (loss) income
(192
)
 
4,301

 
(354
)
 
2,974

Total comprehensive (loss) income
$
(3,993
)
 
$
7,845

 
$
(13,078
)
 
$
(12,817
)
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)
 
General
Partner
Interest
 
Limited Partners’ Capital
Accumulated
Other
Comprehensive
Income
 
Non-controlling interest
 
Total
Partners'
Capital
Common
Units—
Public
 
Common
Units—
Sponsor
 
Units
 
Amount
 
Units
 
Amount
 
Partners' capital, December 31, 2018
$
(133,687
)
 
14,573

 
$
207,612

 
11,905

 
$
72,352

 
$
439

 
$

 
$
146,716

Distributions to unitholders, distribution equivalent and incentive distribution rights
(1,671
)
 

 
(10,269
)
 

 
(7,619
)
 

 

 
(19,559
)
Issuance of units through Long-Term Incentive Plan
(2,129
)
 
94

 
659

 

 

 

 

 
(1,470
)
Issuance of common units, net

 
3,509

 
96,661

 

 

 

 

 
96,661

Non-cash Management Services Agreement expenses
136

 

 
2,072

 

 

 

 

 
2,208

Cumulative effect of accounting change - derivative instruments

 

 
(10
)
 

 
(8
)
 
18

 

 

Other comprehensive loss

 

 

 

 

 
(162
)
 

 
(162
)
Net income (loss)
1,671

 

 
(5,880
)
 

 
(4,714
)
 

 

 
(8,923
)
Partners' capital, March 31, 2019
(135,680
)
 
18,176

 
290,845

 
11,905

 
60,011

 
295

 

 
215,471

Excess consideration over Enviva Wilmington Holdings, LLC net assets and initial recognition of its noncontrolling interest
1,283

 

 

 

 

 

 
(48,192
)
 
(46,909
)
Distributions to unitholders, distribution equivalent and incentive distribution rights
(2,271
)
 

 
(13,720
)
 

 
(8,763
)
 

 

 
(24,754
)
Issuance of units through Long-Term Incentive Plan
247

 
2

 
(287
)
 

 

 

 

 
(40
)
Issuance of common units, net

 
1,692

 
49,641

 

 

 

 

 
49,641

Issuance of units associated with the First JV Drop-Down

 

 

 
1,681

 
50,000

 

 

 
50,000

Non-cash Management Services Agreement expenses
11,226

 

 
1,013

 

 

 

 

 
12,239

Reimbursable charges under Make-Whole Agreement
1,502

 

 

 

 

 

 

 
1,502

Other comprehensive loss

 

 

 

 

 
(192
)
 

 
(192
)
Net income (loss)
2,271

 

 
(3,609
)
 

 
(2,463
)
 

 

 
(3,801
)
Partners' capital, June 30, 2019
$
(121,422
)
 
19,870

 
$
323,883

 
13,586

 
$
98,785

 
$
103

 
$
(48,192
)
 
$
253,157

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 (Continued)
(In thousands)
(Unaudited)
 
General
Partner
Interest
 
Limited Partners’ Capital
 
Accumulated
Other
Comprehensive
Loss
 
Total
Partners'
Capital
Common
Units—
Public
 
Common
Units—
Sponsor
 
Subordinated
Units—
Sponsor
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
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
(1,130
)
 

 
(8,833
)
 

 
(785
)
 

 
(7,381
)
 

 
(18,129
)
Issuance of units through Long-Term Incentive Plan
(2,129
)
 
99

 
(164
)
 
(82
)
 
(1,301
)
 

 

 

 
(3,594
)
Issuance of common units, net

 
8

 
241

 

 

 

 

 

 
241

Non-cash Management Services Agreement expenses
102

 

 
931

 

 

 

 

 

 
1,033

Other comprehensive loss

 

 

 

 

 

 

 
(1,327
)
 
(1,327
)
Net income (loss)
1,130

 

 
(10,233
)
 

 
(983
)
 

 
(9,249
)
 

 
(19,335
)
Partners' capital, March 31, 2018
(130,596
)
 
13,180

 
205,969

 
1,265

 
12,981

 
11,905

 
85,271

 
(4,367
)
 
169,258

Distributions to unitholders, distribution equivalent and incentive distribution rights
(1,264
)
 

 
(9,750
)
 

 

 

 
(7,441
)
 

 
(18,455
)
Issuance of units through Long-Term Incentive Plan
(3,435
)
 
122

 
723

 

 

 

 

 

 
(2,712
)
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
210

 

 
2,480

 

 

 

 

 

 
2,690

Other comprehensive income

 

 

 

 

 

 

 
4,301

 
4,301

Net income (loss)
1,264

 

 
1,252

 

 
354

 

 
674

 

 
3,544

Partners' capital, June 30, 2018
$
(133,821
)
 
14,567

 
$
214,009

 
11,905

 
$
78,504

 

 
$

 
$
(66
)
 
$
158,626

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)
 
Six Months ended
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(12,724
)
 
$
(15,791
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,456

 
19,439

MSA Fee Waivers
11,046

 

Amortization of debt issuance costs, debt premium and original issue discounts
595

 
548

Loss on disposal of assets
350

 
244

Unit-based compensation
3,485

 
3,823

Fair value changes in derivatives
(346
)
 
(2,923
)
Unrealized loss on foreign currency transactions, net
29

 
29

Change in operating assets and liabilities:
 
 
 
Accounts and insurance receivables
(4,167
)
 
33,806

Related-party receivables
(2,536
)
 
66

Prepaid expenses and other current and long-term assets
(340
)
 
(297
)
Inventories
(18
)
 
(12,021
)
Derivatives
563

 
(947
)
Accounts payable, accrued liabilities and other current liabilities
(7,079
)
 
8,436

Related-party payables and accrued liabilities
(356
)
 
(3,445
)
Accrued interest
(578
)
 
60

Operating lease liabilities
(2,472
)
 

Other long-term liabilities
(346
)
 
206

Net cash provided by operating activities
7,562

 
31,233

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(49,892
)
 
(5,879
)
Payment in relation to the Enviva Wilmington Holdings, LLC Drop-Down
(74,700
)
 

Insurance proceeds from property loss

 
1,130

Net cash used in investing activities
(124,592
)
 
(4,749
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt and finance lease obligations, net
92,248

 
27,016

Proceeds from common unit issuances, net
96,970

 
241

Payment of deferred consideration for Enviva Port of Wilmington, LLC Drop-Down
(24,300
)
 

Distributions to unitholders, distribution equivalent rights and incentive distribution rights holder
(43,473
)
 
(36,469
)
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
(1,870
)
 
(1,665
)
Net cash provided by (used in) financing activities
119,575

 
(13,218
)
Net increase in cash, cash equivalents and restricted cash
2,545

 
13,266

Cash, cash equivalents and restricted cash, beginning of period
2,460

 
524

Cash, cash equivalents and restricted cash, end of period
$
5,005

 
$
13,790


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)
 
Six Months ended
June 30,
 
2019
 
2018
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
$
6,200

 
$
7,682

Property, plant and equipment acquired under finance lease obligations
1,080

 
960

Property, plant and equipment capitalized interest
716

 

Distributions included in liabilities
1,181

 
1,056

Withholding tax payable associated with Long-Term Incentive Plan vesting
40

 
2,715

Conversion of subordinated units to common units

 
78,504

Common unit issuance for deferred consideration for Enviva Port of Wilmington, LLC Drop-Down
49,700

 

Common unit issuance for the Enviva Wilmington Holdings, LLC Drop-Down
50,000

 

Common unit issuance costs in accrued liabilities
339

 

Depreciation capitalized to inventories
350

 
1,075

Supplemental cash flow information:
 
 
 
Interest paid
$
18,867

 
$
17,143

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 our principally European, and increasingly Japanese, customers under long-term, take-or-pay contracts.
As of June 30, 2019, we owned and operated six industrial-scale wood pellet production plants located in the Mid-Atlantic and Gulf Coast regions of the United States and are commissioning a seventh plant in Hamlet, North Carolina (the “Hamlet plant”). In addition to the volumes from our plants, we also procure wood pellets from third parties and Enviva Pellets Greenwood, LLC (“Greenwood”), a wholly owned subsidiary of Enviva JV Development Company, LLC (the “Second JV”), a limited liability company owned by Enviva Holdings, LP (together with its wholly owned subsidiaries Enviva MLP Holdco, LLC and Enviva Development Holdings, LLC, where applicable, the “sponsor”) and John Hancock Life Insurance Company (U.S.A.) and certain of its affiliates. Greenwood owns a wood pellet production plant in Greenwood, South Carolina (the “Greenwood plant”). 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, 2018.
Enviva Wilmington Holdings, LLC
In April 2019, we acquired from the sponsor all of the issued and outstanding Class B Units in Enviva Wilmington Holdings, LLC (the “First JV”), a limited liability company owned by the sponsor and John Hancock Life Insurance Company (U.S.A.) and certain of its affiliates (collectively, the “Hancock Member”). As of April 2, 2019, we began to consolidate the First JV because the Class B Units represented a controlling interest in the First JV so we accounted for the First JV as a consolidated subsidiary, not as a joint venture. The First JV owns the Hamlet plant and a firm, 15-year take-or-pay off-take contract with nearly 1.0 million metric tons per year (“MTPY”) of wood pellets, following a ramp period.
On the date of our acquisition of the sponsor’s Class B Units in the First JV, we entered into the following transactions (collectively, the “JV 1.0 Drop-Down”):
We commenced an associated terminal services agreement to handle contracted volumes from the Hamlet plant.
We entered into an agreement with the sponsor, pursuant to which (1) the sponsor will guarantee certain cash flows from the Hamlet plant until June 30, 2020, (2) the sponsor will reimburse us for construction cost overruns in excess of budgeted capital expenditures for the Hamlet plant, subject to certain exceptions, (3) we will pay to the sponsor quarterly incentive payments for any wood pellets produced by the Hamlet plant in excess of forecast production

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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)


levels through June 30, 2020, and (4) the sponsor will retain liability for certain claims payable, if any, by the First JV (the “Make-Whole Agreement”).
The First JV entered into an agreement with Enviva Management to waive the obligation to pay an aggregate of approximately $2.7 million of management fees payable to Enviva Management under the management services agreement (the “First JV MSA”) between the First JV and Enviva Management Company, LLC, a Delaware limited liability company and wholly owned subsidiary of the sponsor (“Enviva Management”), through and including the later of July 1, 2019 and the commencement of commercial operations (“COD”) of the Hamlet plant (the “First JV MSA Fee Waiver”).
We entered into an agreement with Enviva Management to waive the obligation to pay an aggregate of approximately $13.0 million in fees payable under our management services agreement (the “EVA MSA,” and together with the First JV MSA, the “MSAs”) with Enviva Management with respect to the period from the date of the JV 1.0 Drop-Down through the second quarter of 2020 (the “EVA MSA Fee Waiver”).
We assumed the sponsor’s position as lender under a credit agreement between the First JV, as borrower, and the sponsor, as lender (the “First JV Revolver”).
Fees through the MSAs are expensed as incurred and, to the extent any amount is associated with the First JV MSA Fee Waiver and the EVA MSA Fee Waiver, the related amount is recorded as an increase to partners’ capital.
The $165.0 million purchase price for the JV 1.0 Drop-Down consisted of (1) a cash payment of $24.7 million, net of a purchase price adjustment of $0.3 million, (2) the issuance of 1,681,237 unregistered common units at a value of $29.74, or $50.0 million of common units, (3) $50.0 million in cash paid on June 28, 2019, (4) $40.0 million in cash to be paid on January 2, 2020 and (5) the elimination of $3.7 million of net related-party receivables and payables included in the net assets on the date of acquisition. As the holder of the Class B Units, Enviva, LP became a member of the First JV (the “Enviva Member”) on the acquisition date. During the three and six month ended June 30, 2019, we incurred and expensed $0.5 million and $1.2 million, respectively, in acquisition costs to acquire the First JV which were recognized as general and administrative expenses.
As the Enviva Member, we are the managing member of the First JV. We included all accounts of the First JV in our consolidated results as of April 2, 2019 as the Class B Units represent a controlling interest in the First JV. The JV 1.0 Drop-Down was an asset acquisition of entities under common control and accounted for on the carryover basis of accounting. Pursuant to the First JV MSA, Enviva Management provides services to the First JV, including those necessary or incidental to the operation and management of the First JV’s business. The Enviva Member is responsible for managing the activities of the First JV, including the development, construction and operation of the Hamlet plant.
(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, 2018 except for our adoption on and as of January 1, 2019 of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
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.

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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)


Accounting Standards Adopted
Leases
ASU 2016-02 established a right-of-use (“ROU”) model that requires lessees to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term of longer than 12 months and classify leases as operating or finance. Operating lease expense is recorded in a single financial statement line item on a straight-line basis over the lease term. Amortization of the ROU asset is the calculated difference between straight-line lease expense and the accretion of interest on the lease liability each period.
We adopted ASU 2016-02 on and as of January 1, 2019 using the modified retrospective transition method, which we applied to all leases existing at the date of initial application of the ASU. We elected to use the effective date as the date of initial application, as opposed to the beginning of the earliest comparative period presented in the financial statements; consequently, financial information and disclosures are not presented under the new standard for periods prior to January 1, 2019. We elected the package of three practical expedients under the transition guidance within the new standard, which permitted us to reassess our prior conclusions under the previous guidance concerning lease identification, lease classification and initial direct leasing costs. We elected the practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under previous guidance. We did not, however, elect the separate practical expedient pertaining to the use of hindsight in determining the lease term for existing leases. We have a significant contract containing both lease and nonlease components, which are accounted for separately. As this contract has fixed payments, the allocation of lease and nonlease components is based on relative standalone price.
The adoption of the new standard as of January 1, 2019 resulted in the recognition of operating lease ROU assets of $27.4 million, net of $2.1 million of deferred rent liabilities existing as of December 31, 2018, and operating lease liabilities of $29.5 million for operating leases related to real estate, machinery and equipment and other operating leases with terms of longer than 12 months. The amounts recognized as of January 1, 2019 were based on the present value of the remaining minimum rental payments under previous leasing standards for existing operating leases. The classification of a lease affects the pattern and classification of expense recognition in the income statement, which is unchanged from under the previous accounting method. The adoption of the new standard did not change our accounting for finance leases (which were described as “capital leases” under the previous standard) or impact our results of operations and cash flows. See Note 9, Leases.
Derivative Instruments
We adopted ASU 2017-12 on and as of January 1, 2019 using the modified retrospective 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 changes in partner’s capital as of the date of adoption of the new standard. Upon adoption of ASU 2017-12, we no longer measure and recognize ineffectiveness related to designated and qualifying cash flow hedges in earnings; as a result, any ineffectiveness is included in accumulated other comprehensive income. On January 1, 2019, we recorded a nominal cumulative effect adjustment to accumulated other comprehensive income and common units in partners’ capital. See Note 10, Derivatives.
Recently Issued Accounting Standards not yet Adopted
Currently, there are no recently issued accounting standards not yet adopted by us that we expect to be reasonably likely to materially impact the financial position, results of operations or cash flows of the Partnership.
(3) Transactions Between Entities Under Common Control
The JV 1.0 Drop-Down was an asset acquisition of entities under common control and accounted for on the carryover basis of accounting. Accordingly, the consolidated financial statements for the period beginning April 2, 2019 reflect the acquisition.
The purchase price for the JV 1.0 Drop-Down consisted of $165.0 million, which included an initial cash payment of $24.7 million, net of purchase price adjustment of $0.3 million, and the issuance of 1,681,237 unregistered common units at a value of $29.74, or $50.0 million of common units, $50.0 million in cash, paid on June 28, 2019, and $40.0 million in cash, which will be paid on January 2, 2020 as the third and final payment.

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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)


The changes in net assets at carryover basis on April 2, 2019 included $121.6 million net assets of the First JV, net of the elimination of $3.7 million of net related-party receivables and payables. The following table outlines the changes in consolidated net assets resulting from the JV 1.0 Drop-Down on April 2, 2019.
Assets:
 
 
Cash and cash equivalents
 
$
3,426

Related-party receivables
 
945

Prepaid expenses and other current assets
 
22

Property, plant and equipment, net
 
140,446

Other long-term assets
 
8

Total assets
 
144,847

 
 
 
Liabilities:
 
 
Accounts payable
 
6,395

Related-party payables
 
1,923

Accrued and other current liabilities
 
14,965

Capital lease obligations
 
3

Total liabilities
 
23,286

Net assets contributed to Partnership
 
$
121,561

(4) Revenue
Performance Obligations
As of June 30, 2019, the aggregate amount of revenues from contracts with customers allocated to performance obligations that were unsatisfied or partially satisfied was approximately $9.5 billion. This amount excludes forward prices related to variable consideration including inflation and foreign currency and commodity prices. Also, this amount excludes the effects of related foreign currency derivative contracts as they do not represent contracts with customers. As of July 1, 2019 we expect to recognize approximately 4.0% of our remaining performance obligations as revenue during the remainder of 2019, approximately 9.0% in 2020 and the balance thereafter. Our off-take contracts expire at various times through 2040 and our terminal services contracts extend into 2026.
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 six months ended June 30, 2019 and 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 six months ended June 30, 2019, we recognized $0.3 million and $0.4 million. respectively, of revenue related to performance obligations satisfied in previous periods. For the three and six months ended June 30, 2018, we recognized an insignificant amount of revenue related to performance obligations in previous periods.

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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)


Contract Balances
Accounts receivable related to product sales as of June 30, 2019 and December 31, 2018 were $59.9 million and $51.3 million, respectively. We had $0.1 million and $0.3 million of deferred revenue as of June 30, 2019 and December 31, 2018, respectively, for future performance obligations associated with off-take contracts.
(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 and Japan. If the European Union, its member states or Japan significantly modify such legislation or regulations, then our ability to enter into new contracts as our existing 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
June 30,
 
Six Months ended
June 30, 2019
 
2019
 
2018
 
2019
 
2018
Customer A
60
%
 
69
%
 
50
%
 
54
%
Customer B
9
%
 
12
%
 
10
%
 
10
%
Customer C
23
%
 
15
%
 
20
%
 
11
%
Customer D
%
 
%
 
12
%
 
16
%
(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”). The Chesapeake terminal returned to operations on June 28, 2018. During the three and six months ended June 30, 2018, we incurred $20.3 million and $48.7 million, respectively, in costs as a result of the Chesapeake Incident related to asset impairment, inventory write-off and disposal costs, emergency response costs, asset repair costs and business continuity costs, the latter of which represented incremental costs to commission temporary wood pellet storage and handling and ship loading operations at nearby locations to meet our contractual obligations to our customers. As of June 30, 2018, we had recovered $26.3 million related to the Chesapeake Incident, which included $1.1 million of lost profits. As of December 31, 2018, $3.8 million of probable insurance recoveries for the then-remaining costs not yet recovered were included in insurance receivables; we received the $3.8 million in probable insurance recoveries (plus $0.5 million recognized as other income in 2019) in February 2019.
(7) Inventories
Inventories consisted of the following as of:
 
June 30,
2019
 
December 31,
2018
Raw materials and work-in-process
$
8,226

 
$
4,936

Consumable tooling
18,542

 
17,561

Finished goods
4,524

 
8,993

Total inventories
$
31,292

 
$
31,490


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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 as of:
 
June 30,
2019
 
December 31,
2018
Land
$
15,227

 
$
13,492

Land improvements
44,990

 
44,990

Buildings
196,574

 
196,574

Machinery and equipment
437,696

 
434,776

Vehicles
635

 
635

Furniture and office equipment
6,198

 
6,148

Leasehold improvements
987

 
987

Property, plant and equipment - in service
702,307

 
697,602

Less accumulated depreciation
(176,833
)
 
(154,967
)
Property, plant and equipment - in service, net
525,474

 
542,635

Construction in progress
198,616

 
14,393

Total property, plant and equipment, net
$
724,090

 
$
557,028

Total depreciation expense was $11.3 million and $22.5 million, respectively, for the three and six months ended June 30, 2019. Total depreciation expense was $10.0 million and $19.3 million, respectively, for the three and six months ended June 30, 2018. Total interest capitalized related to construction in progress was $0.6 million and $0.7 million, respectively, for the three and six months ended June 30, 2019 and was insignificant for the three and six months ended June 30, 2018. Accrued amounts for property, plant and equipment and construction in progress included in accrued and other current liabilities were $17.0 million and $6.3 million at June 30, 2019 and December 31, 2018, respectively.
(9) Leases
We have operating and finance leases related to real estate, machinery, equipment and other assets where we are the lessee. Leases with an initial term of 12 months or less are not recorded on the balance sheet but are recognized as lease expense on a straight-line basis over the applicable lease terms. Amortization of the ROU asset is calculated as the difference between straight-line lease expense and the accretion of interest on the lease liability each period. In addition to fixed lease payments, we have contracts that incur variable lease expense related to usage (e.g. throughput fees, maintenance and repair and machine hours), which are expensed as incurred. Our leases have remaining terms of one to 28 years, some of which include options to extend the leases for up to 5 years. Our leases are generally noncancellable. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
A discount rate is applied to our leases for balance sheet measurement. As rates are not explicitly defined in the operating and finance lease agreements, we use our incremental borrowing rate for purposes of measuring the ROU assets and lease liabilities for recognized leases. This is a secured interest rate which takes into account our credit rating, the term of our leases, as well as the economic environment in which we operate. Each lease uses a secured interest rate with a term commensurate to the identified lease term.
Operating leases are included in operating lease right-of-use assets, accrued and other current liabilities and long-term operating lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, current portion of long-term debt and finance lease obligations and long-term debt and finance lease obligations on our condensed consolidated balance sheets. Changes in right-of-use assets and operating lease liabilities are included net in change in operating lease liabilities on the condensed consolidated statement of cash flows.

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Notes to Condensed Consolidated Financial Statements
(In thousands, except number of units, per unit amounts and unless otherwise noted)
(Unaudited)


Operating lease ROU assets and liabilities and finance leases were as follows as of June 30, 2019:
Operating leases:
 
 
Operating lease ROU assets, gross
 
$
36,965

Accumulated amortization
 
(3,088
)
Operating lease ROU assets, net
 
$
33,877

 
 
 
Long-term operating lease liabilities
 
$
33,849

Current portion of operating lease liabilities
 
1,751

Total operating lease liabilities
 
$
35,600

 
 
 
Finance leases:
 
 
Property, plant and equipment, gross
 
$
8,914

Accumulated depreciation
 
(4,198
)
Property plant and equipment, net
 
$
4,716

 
 
 
Current portion of long-term finance lease obligations
 
$
2,724

Long-term finance lease obligations
 
1,668

Total finance lease liabilities
 
$
4,392

Operating and finance lease costs were as follows:
Lease Cost
 
Classification
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Operating lease cost:
 
 
 
 
 
 
Fixed lease cost
 
Cost of goods sold
 
$
1,243

 
$
2,277

Variable lease cost
 
Cost of goods sold
 
20

 
26

Short-term lease costs
 
Cost of goods sold
 

 

 
 
Total operating lease costs
 
$
1,263

 
$
2,303

Finance lease cost:
 
 
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 
765

 
1,484

Variable lease cost
 
Cost of goods sold
 
(4
)
 

Interest on lease liabilities
 
Interest expense
 
57

 
109

 
 
Total finance lease costs
 
$
818

 
$
1,593

 
 
Total lease costs
 
$
2,081

 
$
3,896


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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)


Operating and finance lease cash flow information was as follows:
 
 
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
2,472

Operating cash flows from financing leases
 
109

Financing cash flows from financing leases
 
1,248

 
 
 
Assets obtained in exchange for lease obligations:
 
 
Operating leases
 
$
7,467

Financing leases
 
1,080

The future minimum lease payments and the aggregate maturities of operating and finance lease liabilities are as follows as of June 30, 2019:
Years Ending December 31,
 
Operating
Leases
 
Finance
Leases
 
Total
Remainder of 2019
 
$
2,223

 
$
1,660

 
$
3,883

2020
 
4,140

 
2,153

 
6,293

2021
 
3,890

 
683

 
4,573

2022
 
3,719

 
46

 
3,765

2023
 
3,710

 
43

 
3,753

Thereafter
 
65,110

 
3

 
65,113

Total lease payments
 
82,792

 
4,588

 
87,380

Less: imputed interest
 
(47,192
)
 
(196
)
 
(47,388
)
Total present value of lease liabilities
 
$
35,600

 
$
4,392

 
$
39,992

The future minimum lease payments as of December 31, 2018 for operating and finance lease liabilities were $73.8 million and $4.8 million, respectively.
The weighted-average remaining lease terms and discount rates for our operating and finance leases were weighted using the undiscounted future minimum lease payments and are as follows as of June 30, 2019:
Weighted average remaining lease term (years):
 
 
Operating leases
 
24

Finance leases
 
2

Weighted average discount rate:
 
 
Operating leases
 
8
%
Finance leases
 
5
%
(10) 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 from 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

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Notes to Condensed Consolidated Financial Statements
(In thousands, except number of units, per unit amounts and unless otherwise noted)
(Unaudited)


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
For qualifying cash flow hedges, the effective and ineffective 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. Prior to January 1, 2019 and the adoption of ASU 2017-12 (see Note 2, Significant Accounting Policies), the ineffective portion of the gain or loss, if any, was reported in 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.
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, had designated certain of these instruments as cash flow hedges.
Interest Rate Risk
We are exposed to fluctuations in interest rates on borrowings under our senior secured revolving credit facility. We have entered into a pay-fixed, receive-variable interest rate swap that expires in April 2020 to hedge the interest rate risk associated with our variable rate borrowings under our senior secured revolving credit facility. The interest rate swap is designated and qualifies as a cash flow hedge.
The fair value of derivative instruments as of June 30, 2019 and December 31, 2018 were as follows:
 
 
 
 
Asset (Liability)
 
 
Balance Sheet Classification
 
June 30,
2019
 
December 31,
2018
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap
 
 
 
 
 
 
 
 
Other current assets
 
$
202

 
$
508

 
 
Other long-term assets
 

 
118

Total derivatives designated as hedging instruments
 
 
 
$
202

 
$
626

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency exchange forward contracts:
 
 
 
 
 
 
 
 
Prepaid and other current assets
 
$
1,490

 
$
794

 
 
Other long-term assets
 
1,205

 
1,810

 
 
Accrued and other current liabilities
 
(44
)
 
(68
)
 
 
Other long-term liabilities
 
(23
)
 
(179
)
Foreign currency purchased option contracts:
 
 
 
 
 
 
 
 
Prepaid and other current assets
 
84

 
22

 
 
Other long-term assets
 
2,866

 
3,348

Total derivatives not designated as hedging instruments
 
 
 
$
5,578

 
$
5,727

Net gains related to the change in fair market value of derivative instruments not designated as hedging instruments were $2.3 million and $0.3 million respectively, during the three and six months ended June 30, 2019 and are included 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)


Net gains related to the change in fair market value of derivative instruments not designated as hedging instruments were $3.5 million and $2.7 million, respectively, during the three and six months ended June 30, 2018 and are included in product sales. Realized losses and gains related to derivatives settled during the three months ended June 30, 2019 and 2018 were insignificant. Realized gains related to derivatives settled during the period were $0.1 million and $0.3 million, during the six months ended June 30, 2019 and 2018, and are included in product sales.
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 June 30, 2019 were as follows:
 
Amount of Loss in Other
Comprehensive
Loss on
Derivative
 
Location of
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss
 
Amount of
Gain 
Reclassified from
Accumulated Other
Comprehensive
Loss
into Earnings
Interest rate swap
$
(106
)
 
Interest expense
 
$
86

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 six months ended June 30, 2019 were as follows:
 
Amount of Loss in Other
Comprehensive
Loss on
Derivative
 
Location of
Gain
Reclassified from
Accumulated Other
Comprehensive
Loss
 
Amount of
Gain 
Reclassified from
Accumulated Other
Comprehensive
Loss
into Earnings
Interest rate swap
$
(161
)
 
Other income (expense)
 
$
193

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 June 30, 2018 were as follows:
 
Amount of Gain
in Other
Comprehensive
Income on
Derivative
(Effective Portion)
 
Location of
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income
(Effective Portion)
 
Amount of
Gain
Reclassified from
Accumulated Other
Comprehensive
Income
into Income
(Effective Portion)
 
Location of (Loss) Gain
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
Amount of Gain
(Loss) Recognized in
Earnings on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Foreign currency exchange forward contracts
$
3,950

 
Product sales
 
$

 
Product sales
 
$
(3
)
Foreign currency exchange purchased option contracts
307

 
Product sales
 

 
Product sales
 

Interest rate swap
108

 
Interest expense
 
64

 
Interest expense
 
1

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 six months ended June 30, 2018 were as follows:
 
Amount of Gain
(Loss) in Other
Comprehensive
Income on
Derivative
(Effective Portion)
 
Location of
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income
(Effective Portion)
 
Amount of
Gain
Reclassified from
Accumulated Other
Comprehensive
Income
into Earnings
(Effective Portion)
 
Location of Gain
(Loss) Recognized in
Earnings on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
Amount of Gain
(Loss) Recognized in
Earnings on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Foreign currency exchange forward contracts
$
2,625

 
Product sales
 
$

 
Product sales
 
$
(5
)
Foreign currency exchange purchased option contracts
(16
)
 
Product sales
 

 
Product sales
 

Interest rate swap
428

 
Other income (expense)
 
63

 
Other income (expense)
 
1

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 June 30, 2019, we would have

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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)


received a net settlement termination payment of $5.8 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 as of June 30, 2019 and December 31, 2018 were as follows:
 
June 30,
2019
 
December 31,
2018
Foreign exchange forward contracts in GBP
£
35,885

 
£
42,170

Foreign exchange purchased option contracts in GBP
£
39,365

 
£
39,365

Foreign exchange forward contracts in EUR
7,000

 
14,300

Foreign exchange purchased option contracts in EUR
1,675

 
1,675

Interest rate swap
$
37,091

 
$
39,829

(11) Fair Value Measurements
The amounts reported in the unaudited condensed consolidated balance sheets as cash and cash equivalents, accounts receivable, insurance receivables, 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 finance lease obligations, including the current portion, are classified as Level 2 instruments. The fair value of our senior notes (see Note 12, Long-Term Debt and Finance 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 finance lease obligations classified as Level 2 was determined based on the usage of market prices not quoted on active markets and other observable market data. The fair value of long-term debt and finance lease obligations are based upon rates currently available for debt and finance lease obligations with similar terms and remaining maturities. The carrying amount of derivative instruments approximates fair value.
The carrying amount and estimated fair value of long-term debt and finance lease obligations as of June 30, 2019 and December 31, 2018 were as follows:
 
June 30, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Senior notes
$
353,178

 
$
367,378

 
$
352,843

 
$
359,943

Other long-term debt and finance lease obligations
172,903

 
172,903

 
79,812

 
79,812

Total long-term debt and finance lease obligations
$
526,081

 
$
540,281

 
$
432,655

 
$
439,755

(12) Long-Term Debt and Finance Lease Obligations
Long-term debt and finance lease obligations at carrying value are composed of the following:
 
 
June 30,
2019
 
December 31,
2018
Senior notes, net of unamortized discount, premium and debt issuance of $1.8 million as of June 30, 2019 and $2.2 million as of December 31, 2018
 
$
353,178

 
$
352,843

Senior secured revolving credit facility
 
166,500

 
73,000

Other loans
 
2,011

 
2,015

Finance leases
 
4,392

 
4,797

Total long-term debt and finance lease obligations
 
526,081

 
432,655

Less current portion of long-term debt and finance lease obligations
 
(2,733
)
 
(2,722
)
Long-term debt and finance lease obligations, excluding current installments
 
$
523,348

 
$
429,933


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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)


Senior Notes Due 2021
As of June 30, 2019 and December 31, 2018, 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.
Senior Secured Revolving Credit Facility
As of June 30, 2019 and December 31, 2018, we were in compliance with all covenants and restrictions associated with, and no events of default existed under, our senior secured revolving credit facility due October 2023. Our obligations under the senior secured revolving credit facility are guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets. The senior secured revolving credit facility is not guaranteed by the First JV or secured by liens on its assets.
(13) Related-Party Transactions
Related-party transaction amounts included on the unaudited condensed consolidated statements of operations were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Other revenue
$
235

 
$
1,072

 
$
827

 
$
2,304

Cost of goods sold
34,623

 
20,912

 
54,621

 
36,051

General and administrative expenses
8,789

 
3,458

 
13,002

 
7,514

Management Services Agreements
Pursuant to the MSAs, Enviva Management provides us with operations, general administrative, management and other services. We are required to reimburse Enviva Management for the amount of all direct or indirect internal or third-party expenses incurred by Enviva Management in connection with the provision of such services. The MSAs include rent-related amounts for non-cancelable operating leases for office space in Maryland and North Carolina held by the sponsor. Under the First JV MSA, to the extent allocated costs exceed the annual management fee, the additional costs are recorded with an increase to partners’ capital.
During the three and six months ended June 30, 2019, $20.1 million and $33.7 million, respectively, related to the MSAs was included in cost of goods sold and $8.8 million and $13.0 million, respectively, was included in general and administrative expenses. As of June 30, 2019, $0.7 million incurred under the MSAs was included in finished goods inventory.
During the three and six months ended June 30, 2018, $13.8 million and $22.5 million, respectively, related to the MSAs was included in cost of goods sold and $3.5 million and $7.5 million, respectively, was included in general and administrative expenses.
During the three and six months ended June 30, 2019, $0.9 million of fees expensed under the First JV MSA was in excess of the required payment and recorded to partner’s capital.
As of June 30, 2019 and December 31, 2018, we had $18.3 million and $19.0 million, respectively, included in related-party payables primarily related to the MSAs.
EVA MSA Fee Waiver
Under the EVA MSA, during the three and six months ended June 30, 2019, $4.7 million of EVA MSA fees expensed were waived and recorded as an increase to partners’ capital. During the three and six months ended June 30, 2018, no EVA MSA fees were waived.

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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)


Second EVA MSA Fee Waiver
In June 2019, we entered into an additional agreement with Enviva Management where we received a $5.0 million waiver of EVA MSA fees through September 30, 2019, as consideration for an assignment of two shipping contracts to our sponsor to rebalance our and our sponsor’s respective shipping obligations under existing off-take contracts. During the three and six months ended June 30, 2019, $2.7 million of EVA MSA fees expensed were waived and recorded as an increase to partners’ capital. During the three and six months ended June 30, 2018, no EVA MSA fees were waived.
First JV MSA Fee Waiver
Under the First JV MSA, during the three and six months ended June 30, 2019, $2.7 million of First JV MSA fees expensed were waived and recorded as an increase to partners’ capital. During the three and six months ended June 30, 2018, no First JV MSA fees were waived.
Make-Whole Agreement
During the three and six months ended June 30, 2019, we had $2.1 million of reimbursable charges from the sponsor under the Make-Whole Agreement, of which $1.5 million was related to construction costs and is included in partners’ capital on the consolidated statements of changes in partners’ capital and $0.6 million is related to wood pellet production costs and is included in cost of goods sold on the consolidated statements of operations. During the three and six months ended June 30, 2018, no reimbursements related to the Make-Whole Agreement were received. As of June 30, 2019, $2.1 million is included in related-party receivables related to the Make-Whole Agreement.
Wilmington Drop-Down - Deferred Consideration
In October 2017, we acquired from the First JV all of the issued and outstanding limited liability company interests in Enviva Port of Wilmington, LLC (“Wilmington”), which owns the Wilmington terminal assets (the “Wilmington Drop-Down”), for total consideration of $130.0 million, subject to certain conditions. The Wilmington Drop-Down included the Wilmington terminal assets and a long-term terminal services agreement with our sponsor (the “Holdings TSA”) to handle throughput volumes sourced from Greenwood. The purchase price included $74.0 million of deferred consideration, which was paid in full in April 2019 and consisted of $24.3 million in cash, of which $22.8 million was distributed to the Hancock Member and the issuance of 1,691,627 common units, or approximately $49.7 million in common units, which were distributed to the Hancock Member. The $74.0 million of deferred consideration was reflected on the condensed consolidated balance sheets as of December 31, 2018.
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 we have a take-or-pay obligation with respect to 550,000 MTPY of wood pellets from July 2019 through March 2022.
During the three and six months ended June 30, 2019, we purchased $13.7 million and $24.2 million, respectively, of wood pellets and recorded a cost of cover deficiency fee from Greenwood of approximately $0.3 million and $3.3 million, respectively, from Greenwood as Greenwood was unable to satisfy certain commitments. Of the net $13.4 million and $20.9 million, respectively, $13.7 million and $24.1 million, respectively, is included in cost of goods sold and $0.1 million is included in finished goods inventory as of June 30, 2019. During the three and six months ended June 30, 2018, we purchased $5.2 million and $8.3 million, respectively, of wood pellets from Greenwood, which is included in cost of goods sold.
As of June 30, 2019, $4.2 million is included in related-party payables related to our wood pellet purchases from Greenwood and $1.0 million is included in related-party receivables related to Greenwood’s cost of cover deficiency fee. As of December 31, 2018, $7.9 million is included in related-party payables related to our wood pellet purchases from Greenwood.
Holdings TSA
The Wilmington Drop-Down included a long-term terminal services agreement with our sponsor (the “Holdings TSA”). Pursuant to the Holdings TSA, our 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. We did not record any terminal services revenue from our

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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)


sponsor during the three months ended June 30, 2018. During the six months ended June 30, 2018, we recorded $0.8 million as terminal services revenue from our sponsor, which is included in other revenue.
In February 2018, our 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 six months ended June 30, 2019 and 2018, we recorded $0.2 million and $0.8 million, respectively, and $1.1 million and $1.5 million, respectively, of deficiency fees from Greenwood, which is included in other revenue.
Biomass Option Agreement – Enviva Holdings, LP
Enviva, LP purchased $1.7 million of wood pellets from the sponsor during the six months ended June 30, 2018 pursuant to a biomass option agreement. The wood pellet purchase amounts are included in cost of goods sold. The biomass option agreement terminated in accordance with its terms in March 2018.
Enviva FiberCo, LLC
We purchase raw materials from Enviva FiberCo, LLC (“FiberCo”), a wholly owned subsidiary of our sponsor. During the three and six months ended June 30, 2019, we purchased raw materials of $1.7 million and $3.6 million, respectively, from FiberCo. No cost of cover deficiency fees were recognized during the three months ended June 30, 2019. Offsetting the raw material purchases during the six months ended June 30, 2019, we recognized $2.9 million of cost of cover deficiency fees from FiberCo under a wood supply master agreement as FiberCo was unable to satisfy certain commitments, which is included in related-party receivables as of June 30, 2019. During the three and six months ended June 30, 2018 we purchased raw materials of $1.8 million and $3.5 million, respectively, from FiberCo. No cost of cover deficiency fees were recognized during the three months ended June 30, 2018.
JV 1.0 Drop-Down
In connection with the JV 1.0 Drop-Down, the sponsor assigned to us all of its rights and obligations under the First JV Revolver. On the date of assignment, $4.1 million was outstanding from the First JV to the sponsor. As a result of the assignment, the balance on the First JV Revolver became due from the First JV to the Partnership. As of June 30, 2019, $4.1 million is included in related-party payable and is due to the sponsor.
Long-Term Incentive Plan Vesting
As of June 30, 2019, we had an insignificant amount included in related-party payables related to withholding tax amounts due to Enviva Management associated with the vesting of time-based phantom units under the Enviva Partners, LP Long-Term Incentive Plan (“LTIP”).
(14) Partners’ Capital
Common Units - Issuance
During March 2019, we issued 3,508,778 common units in a registered direct offering for net proceeds of approximately $97.0 million, net of $3.0 million of issuance costs.
On April 1, 2019, as deferred consideration for the Wilmington Drop-Down, we issued 1,691,627 common units, or $49.7 million in common units, to the First JV, which common units were distributed to the Hancock Member. On April 2, 2019, in connection with the JV 1.0 Drop-Down, we issued 1,681,237 common units, or $50.0 million in common units, to the sponsor.
Allocations of Net Income
The Partnership’s partnership agreement contains provisions for the allocation of net income and loss to the unitholders of the Partnership and the General Partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners of the Partnership in accordance with their respective percentage ownership interest. Such allocations are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions, which are allocated 100% to the General Partner.

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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)


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. Our general partner (“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 and six months ended June 30, 2019, we did not sell common units under the ATM Program. During the three months ended June 30, 2018, we did not sell common units under the ATM Program. During the six months ended June 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. Net proceeds from sales under the ATM Program were used for general partnership purposes.
First JV
The capital of the First JV is divided into two classifications: (1) Class A Units and (2) Class B Units, issued at a price of $1.00 per unit for each class.
Class A Units - Noncontrolling Interests
Class A Units were issued to the Hancock Member in exchange for capital contributions at a price of $1.00 for each Class A Unit.
The Hancock Member had a total capital commitment of $235.2 million and, as of June 30, 2019, the Hancock Member held 227.0 million Class A Units with a remaining capital commitment amount of $8.2 million.
Class B Units - Controlling Interests
Class B Units were issued to the Enviva Member in exchange for capital contributions at a price of $1.00 for each Class B Unit.
The Enviva Member had a total capital commitment of $232.2 million and, as of June 30, 2019, the Enviva Member held 224.0 million Class B Units with a remaining commitment amount of $8.2 million.
Pursuant to the limited liability company agreement of the First JV (the “First JV LLCA”), we are the managing member of the First JV and have the authority to manage the business and affairs of the First JV and take actions on its behalf, including adopting annual budgets, entering into agreements, effecting asset sales or biomass purchase agreements, making capital calls, incurring debt and taking other actions, subject to consent of the Hancock Member in certain circumstances. The First JV LLCA also sets forth the capital commitments and limitations thereon from each of the members, and provides for the allocation of sale proceeds and distributions among the holders of outstanding Class A Units and Class B Units.
We included all accounts of the First JV in our consolidated results as of April 2, 2019 as the Class B Units represent a controlling interest in the First JV.

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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)


Distribution Rights
Distributions to the Hancock Member, and to the Enviva member, are made in the reasonable discretion of the Enviva Member and are governed by the waterfall provisions of the First JV LLCA, which provides that distributions, after repayment of the First JV Revolver borrowings, are to be made as follows:
First: To the members in proportion to their relative unreturned capital contributions, then to the members in proportion to their relative unpaid preference amount.
Thereafter: 25% to the Hancock Member and 75% to the Enviva Member.
Prior to the JV 1.0 Drop-Down, at the discretion of the Enviva Member, the Hancock Member had received all of its capital contributions and substantially all of its preference amount. Given that and the historical net losses of the First JV having been previously allocated to the Enviva Member and the Hancock Member in proportion to their unreturned capital contributions, the balance of the First JV members’ capital attributable had become negative as of the JV 1.0 Drop-Down. Additionally, given that and the extent to which the Enviva Member has yet to receive repayment of its revolver borrowings, capital contributions and preference amount as of June 30, 2019, none of the net loss of the First JV has been allocated to the Hancock Member subsequent to the date of the JV 1.0 Drop-Down. Thus, no change has been recognized to the negative noncontrolling interest balance that we acquired.
(15) Equity-Based Awards
The following table summarizes information regarding phantom unit awards (the “Affiliate Grants”) under the LTIP to employees of Enviva Management who provide services to the Partnership:
 
Time-Based
Phantom Units
 
Performance-Based
Phantom Units
 
Total Affiliate Grant
Phantom Units
 
Units
 
Weighted-
Average
Grant Date
Fair Value
(per unit)(1)
 
Units
 
Weighted-
Average
Grant Date
Fair Value
(per unit)(1)
 
Units
 
Weighted-
Average
Grant Date
Fair Value
(per unit)(1)
Nonvested December 31, 2018
723,940

 
$
25.91

 
239,512

 
$
27.65

 
963,452

 
$
26.34

Granted
372,007

 
$
30.39

 
214,437

 
$
30.25

 
586,444

 
$
30.34

Forfeitures
(35,459
)
 
$
27.55

 
(7,607
)
 
$
29.57

 
(43,066
)
 
$
27.91

Vested
(145,506
)
 
$
18.30

 

 
$

 
(145,506
)
 
$
18.30

Nonvested June 30, 2019
914,982

 
$
28.88

 
446,342

 
$
28.86

 
1,361,324

 
$
28.87

______________________________________________________________
(1)
Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.
As of June 30, 2019, an insignificant amount is included in related-party payables to Enviva Management to satisfy tax-withholding requirements associated with time-based phantom awards that vested under the LTIP during the six months ended June 30, 2019. During the six months ended June 30, 2018, we paid $2.3 million to the General Partner, which acquired common units from a wholly owned subsidiary of our sponsor for delivery to the recipients under the LTIP. We also paid $1.7 million during the six months ended June 30, 2018 to Enviva Management to satisfy the tax-withholding requirements associated with such common units under the MSAs.

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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)


The following table summarizes information regarding phantom unit awards to certain non-employee directors of the General Partner (the “Director Grants”) under the LTIP:
 
Time-Based 
Phantom Units
 
Units
 
Weighted-
Average
Grant Date
Fair Value
(per unit)(1)
Nonvested December 31, 2018
13,964

 
$
28.65

Granted
13,444

 
$
30.16

Vested
(13,964
)
 
$
28.65

Nonvested June 30, 2019
13,444

 
$
30.16

In February 2019, Director Grants valued at $0.4 million were granted and vest on the first anniversary of the grant date. In February 2019, the Director Grants that were nonvested at December 31, 2018 vested, and common units were issued in respect of such vested Director Grants.
Distribution Equivalent Rights
There were no paid DER distributions related to time-based Affiliate Grants for the three months ended June 30, 2019. Paid DER distributions related to time-based Affiliate Grants were $0.9 million for the six months ended June 30, 2019. Paid DER distributions related to the time-based Affiliate Grants were $1.2 million for the six months ended June 30, 2018. Paid DER distributions were insignificant for the three months ended June 30, 2018. At June 30, 2019 and December 31, 2018, $1.2 million and $0.9 million, respectively, of DER distributions were included in related-party accrued liabilities.
Unpaid distribution equivalent rights (“DERs”) amounts related to the performance-based Affiliate Grants at June 30, 2019 were $1.3 million, of which $0.5 million are included in accrued liabilities and $0.8 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, 2018 were $0.7 million, of which $0.4 million are included in accrued liabilities and $0.3 million are included in other long-term liabilities.
(16) 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 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 June 30, 2019, the only periods subject to examination for federal and state income tax returns are 2015 through 2018. 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 six months ended June 30, 2019 and 2018, no provision for federal or state income taxes has been recorded in the condensed consolidated financial statements.
(17) Net Income (Loss) per Limited Partner Unit
Net income (loss) per unit applicable to limited partners is computed by dividing limited partners’ interest in net income (loss), after deducting any incentive distributions, by the weighted-average number of outstanding common 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.

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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)


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.
In addition to the common 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 previously applicable to subordinated limited partner units were the same because there are no potentially dilutive subordinated units outstanding.
The following computation of net income (loss) per limited partner unit is as follows for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30, 2019
 
Common
Units
 
General
Partner
Weighted-average common units outstanding—basic
33,400

 

Effect of nonvested phantom units

 

Weighted-average common units outstanding—diluted
33,400

 

 
Three Months Ended June 30, 2019
 
Common
Units
 
General
Partner
 
Total
Distributions declared
$
22,081

 
$
2,773

 
$
24,854

Earnings less than distributions
(28,655
)
 

 
(28,655
)
Net (loss) income attributable to partners
$
(6,574
)
 
$
2,773

 
$
(3,801
)
Weighted-average units outstanding—basic and diluted
33,400

 
 
 
 
Net loss per limited partner unit—basic and diluted
$
(0.20
)
 
 
 
 

 
Six Months Ended June 30, 2019
 
Common
Units
 
General
Partner
Weighted-average common units outstanding—basic
30,098

 

Effect of nonvested phantom units

 

Weighted-average common units outstanding—diluted
30,098

 



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Notes to Condensed Consolidated Financial Statements
(In thousands, except number of units, per unit amounts and unless otherwise noted)
(Unaudited)


 
Six Months Ended June 30, 2019
 
Common
Units
 
General
Partner
 
Total
Distributions declared
$
43,661

 
$
5,043

 
$
48,704

Earnings less than distributions
(61,428
)
 

 
(61,428
)
Net (loss) income attributable to partners
$
(17,767
)
 
$
5,043

 
$
(12,724
)
Weighted-average units outstanding—basic and diluted
30,098

 
 
 
 
Net loss per limited partner unit—basic and diluted
$
(0.59
)
 
 
 
 

 
Three Months Ended June 30, 2018
 
Common
Units
 
Subordinated
Units
 
General
Partner
Weighted-average common units outstanding—basic
18,597

 
7,804

 

Effect of nonvested phantom units
1,131

 

 

Weighted-average common units outstanding—diluted
19,728

 
7,804

 

 
Three Months Ended June 30, 2018
 
Common
Units
 
Subordinated
Units
 
General
Partner
 
Total
Distributions declared
$
11,750

 
$
4,931

 
$
1,400

 
$
18,081

Earnings less than distributions
(10,240
)
 
(4,297
)
 

 
(14,537
)
Net income attributable to partners
$
1,510

 
$
634

 
$
1,400

 
$
3,544

Weighted-average units outstanding—basic
18,597

 
7,804

 
 
 
 
Weighted-average units outstanding—diluted
19,728

 
7,804

 
 
 
 
Net income per limited partner unit—basic
$
0.08

 
$
0.08

 
 
 
 
Net income per limited partner unit—diluted
$
0.08

 
$
0.08

 
 
 
 

 
Six Months Ended June 30, 2018
 
Common
Units
 
Subordinated
Units
 
General
Partner
Weighted-average common units outstanding—basic
16,518

 
9,855

 

Effect of nonvested phantom units

 

 

Weighted-average common units outstanding—diluted
16,518

 
9,855

 


 
Six Months Ended June 30, 2018
 
Common
Units
 
Subordinated
Units
 
General
Partner
 
Total
Distributions declared
$
20,788

 
$
12,403

 
$
2,664

 
$
35,855

Earnings less than distributions
(32,347
)
 
(19,299
)
 

 
(51,646
)
Net (loss) income attributable to partners
$
(11,559
)
 
$
(6,896
)
 
$
2,664

 
$
(15,791
)
Weighted-average units outstanding—basic and diluted
16,518

 
9,855

 
 
 
 
Net loss per limited partner unit—basic and diluted
$
(0.70
)
 
$
(0.70
)
 
 
 
 

29

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)


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):
Quarter Ended
 
Declaration
Date
 
Record
Date
 
Payment
Date
 
Distribution 
Per Unit
 
Total Cash
Distribution
 
Total
Payment to
General
Partner for
Incentive
Distribution
Rights
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

December 31, 2018
 
January 29, 2019
 
February 15, 2019
 
February 28, 2019
 
$
0.6400

 
$
17.0

 
$
1.7

March 31, 2019
 
May 2, 2019
 
May 20, 2019
 
May 29, 2019
 
$
0.6450

 
$
21.6

 
$
2.3

June 30, 2019
 
July 31, 2019
 
August 15, 2019
 
August 29, 2019
 
$
0.6600

 
$
22.1

 
$
2.8

Distributions to be 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 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.
(18) Supplemental Guarantor Information
The Partnership and its wholly owned finance subsidiary, Enviva Partners Finance Corp., are the co-issuers of our senior notes on a joint and several basis. The senior notes are guaranteed on a senior unsecured basis by certain of the Partnership’s direct and indirect wholly owned subsidiaries (excluding Enviva Partners Finance Corp. and certain immaterial subsidiaries) and will be guaranteed by the Partnership’s future restricted subsidiaries that guarantee certain of its 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 the senior notes. Other than certain restrictions arising under the senior secured revolving credit facility and the indenture governing the senior notes (see Note 12, Long-Term Debt and Finance Lease Obligations), there are no significant restrictions on the ability of any restricted subsidiary to (i) pay dividends or make any other distributions to the Partnership or any of its restricted subsidiaries or (ii) make loans or advances to the Partnership or any of its restricted subsidiaries. As of June 30, 2019, 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 June 30, 2019, condensed consolidating financial information required under Rule 3-10 was not provided as our non-guarantor subsidiaries were considered minor or were not required to be presented.

30

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 Balance Sheet
June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,629

 
$
1,376

 
$

 
$
5,005

Accounts receivable
61,812

 
6

 

 
61,818

Insurance receivables
2,258

 

 

 
2,258

Related-party receivables
14,322

 
8,370

 
(17,005
)
 
5,687

Inventories
30,985

 
307

 

 
31,292

Prepaid expenses and other current assets
2,847

 
222

 

 
3,069

Total current assets
115,853

 
10,281

 
(17,005
)
 
109,129

 
 
 
 
 
 
 
 
Property, plant and equipment - in service, net
523,691

 
1,783

 

 
525,474

Construction in progress
39,300

 
159,496

 
(180
)
 
198,616

Total Property, plant and equipment, net
562,991

 
161,279

 
(180
)
 
724,090

 
 
 
 
 
 
 
 
Operating lease right-of-use assets, net
26,935

 
6,942

 

 
33,877

Related-party note receivable
26,989

 

 
(26,989
)
 

Goodwill
85,615

 

 

 
85,615

Investment in subsidiaries
118,543

 

 
(118,543
)
 

Other long-term assets
7,038

 

 
(180
)
 
6,858

Total assets
$
943,964

 
$
178,502

 
$
(162,897
)
 
$
959,569

 
 
 
 
 
 
 
 
Liabilities and Partners’ Capital
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
12,706

 
$
2,942

 
$

 
$
15,648

Related-party payables and accrued liabilities
35,766

 
10,712

 
(17,005
)
 
29,473

Deferred consideration for drop-downs due to related party
40,000

 

 

 
40,000

Accrued and other current liabilities
38,000

 
14,788

 

 
52,788

Current portion of interest payable
5,512

 

 

 
5,512

Current portion of long-term debt and finance lease obligations
2,733

 

 

 
2,733

Total current liabilities
134,717

 
28,442

 
(17,005
)
 
146,154

Long-term debt and finance lease obligations
523,348

 

 

 
523,348

Related-party long-term debt

 
26,989

 
(26,989
)
 

Long-term operating lease liabilities
27,726

 
6,123

 

 
33,849

Long-term interest payable
1,070

 

 

 
1,070

Long-term interest related-party payable

 
180

 
(180
)
 

Other long-term liabilities
1,991

 

 

 
1,991

Total liabilities
688,852

 
61,734

 
(44,174
)
 
706,412

Total Enviva Partners, LP partners' capital
255,112

 
164,960

 
(118,723
)
 
301,349

Noncontrolling interest

 
(48,192
)
 

 
(48,192
)
Total partners’ capital
255,112

 
116,768

 
(118,723
)
 
253,157

Total liabilities and partners’ capital
$
943,964

 
$
178,502

 
$
(162,897
)
 
$
959,569


31

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 Balance Sheet
December 31, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,396

 
$
64

 
$

 
$
2,460

Accounts receivable
54,792

 
2

 

 
54,794

Insurance receivables
5,140

 

 

 
5,140

Related-party receivables
6,453

 
4,944

 
(10,005
)
 
1,392

Inventories
31,490

 

 

 
31,490

Prepaid expenses and other current assets
2,235

 

 

 
2,235

Total current assets
102,506


5,010


(10,005
)
 
97,511

 
 
 
 
 
 
 
 
Property, plant and equipment - in service, net
542,635

 

 

 
542,635

Construction in progress
14,393

 

 

 
14,393

Total Property, plant and equipment, net
557,028

 

 

 
557,028

 
 
 
 
 
 
 
 
Goodwill
85,615

 

 

 
85,615

Investment in subsidiaries
652

 

 
(652
)
 

Other long-term assets
8,616

 

 

 
8,616

Total assets
$
754,417

 
$
5,010

 
$
(10,657
)
 
$
748,770

 
 
 
 
 
 
 
 
Liabilities and Partners’ Capital
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
15,551

 
$

 
$

 
$
15,551

Related-party payables and accrued liabilities
33,169

 
5,061

 
(10,005
)
 
28,225

Deferred consideration for drop-downs due to related party
74,000

 

 

 
74,000

Accrued and other current liabilities
41,395

 
5

 

 
41,400

Current portion of interest payable
5,434

 

 

 
5,434

Current portion of long-term debt and finance lease obligations
2,722

 

 

 
2,722

Total current liabilities
172,271

 
5,066

 
(10,005
)
 
167,332

Long-term debt and finance lease obligations
429,933

 

 

 
429,933

Long-term interest payable
1,010

 

 

 
1,010

Other long-term liabilities
3,779

 

 

 
3,779

Total liabilities
606,993

 
5,066

 
(10,005
)
 
602,054

Total partners’ capital
147,424

 
(56
)
 
(652
)
 
146,716

Total liabilities and partners’ capital
$
754,417

 
$
5,010

 
$
(10,657
)
 
$
748,770


32

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 Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product sales
$
167,202

 
$

 
$

 
$
167,202

Other revenue
1,552

 

 
(675
)
 
877

Net revenue
168,754

 

 
(675
)
 
168,079

Cost of goods sold
140,476

 

 

 
140,476

Depreciation and amortization
11,096

 

 

 
11,096

Total cost of goods sold
151,572

 

 

 
151,572

Gross margin
17,182

 

 
(675
)
 
16,507

General and administrative expenses
1,253

 
1,663

 
(675
)
 
2,241

Related-party management services agreement fee
5,114

 
3,675

 

 
8,789

Total general and administrative expenses
6,367

 
5,338

 
(675
)
 
11,030

Income (loss) from operations
10,815

 
(5,338
)
 

 
5,477

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(9,169
)
 
(27
)
 

 
(9,196
)
Other income (expense), net
47

 
51

 
(180
)
 
(82
)
Total other (expense) income, net
(9,122
)
 
24

 
(180
)
 
(9,278
)
Net income (loss)
$
1,693

 
$
(5,314
)
 
$
(180
)
 
$
(3,801
)
Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product sales
$
133,168

 
$

 
$

 
$
133,168

Other revenue
2,428

 

 

 
2,428

Net revenue
135,596

 

 

 
135,596

Cost of goods sold
105,967

 

 

 
105,967

Depreciation and amortization
9,818

 

 

 
9,818

Total cost of goods sold
115,785

 

 

 
115,785

Gross margin
19,811

 

 

 
19,811

General and administrative expenses
3,811

 
18

 

 
3,829

Related-party management services agreement fee
3,458

 

 

 
3,458

Total general and administrative expenses
7,269

 
18

 

 
7,287

Income (loss) from operations
12,542

 
(18
)
 

 
12,524

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(9,047
)
 

 

 
(9,047
)
Other income (expense), net
161

 
(94
)
 

 
67

Total other expense, net
(8,886
)
 
(94
)
 

 
(8,980
)
Net income (loss)
$
3,656

 
$
(112
)
 
$

 
$
3,544


33

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 Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product sales
$
323,801

 
$

 
$

 
$
323,801

Other revenue
3,322

 

 
(675
)
 
2,647

Net revenue
327,123

 

 
(675
)
 
326,448

Cost of goods sold
277,868

 

 

 
277,868

Depreciation and amortization
22,166

 

 

 
22,166

Total cost of goods sold
300,034

 

 

 
300,034

Gross margin
27,089

 

 
(675
)
 
26,414

General and administrative expenses
6,871

 
1,669

 
(675
)
 
7,865

Related-party management services agreement fee
9,327

 
3,675

 

 
13,002

Total general and administrative expenses
16,198

 
5,344

 
(675
)
 
20,867

Income (loss) from operations
10,891

 
(5,344
)
 

 
5,547

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(18,802
)
 
(27
)
 

 
(18,829
)
Other income (expense), net
687

 
51

 
(180
)
 
558

Total other expense, net
(18,115
)
 
24

 
(180
)
 
(18,271
)
Net loss
$
(7,224
)
 
$
(5,320
)
 
$
(180
)
 
$
(12,724
)
Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Product sales
$
255,490

 
$

 
$

 
$
255,490

Other revenue
5,430

 

 

 
5,430

Net revenue
260,920

 

 

 
260,920

Cost of goods sold
227,005

 

 

 
227,005

Depreciation and amortization
19,122

 

 

 
19,122

Total cost of goods sold
246,127

 

 

 
246,127

Gross margin
14,793

 

 

 
14,793

General and administrative expenses
6,557

 
20

 

 
6,577

Related-party management services agreement fee
7,514

 

 

 
7,514

Total general and administrative expenses
14,071

 
20

 

 
14,091

Income (loss) from operations
722

 
(20
)
 

 
702

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(17,692
)
 

 

 
(17,692
)
Other income (expense), net
1,293

 
(94
)
 

 
1,199

Total other expense, net
(16,399
)
 
(94
)
 

 
(16,493
)
Net loss
$
(15,677
)
 
$
(114
)
 
$

 
$
(15,791
)

34

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 (Loss)
For the Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
1,693

 
$
(5,314
)
 
$
(180
)
 
$
(3,801
)
Other comprehensive loss:
 
 
 
 
 
 
 
Net unrealized losses on cash flow hedges
(106
)
 

 

 
(106
)
Reclassification of net gains realized into net income (loss)
(86
)
 

 

 
(86
)
Total other comprehensive loss
(192
)




 
(192
)
Total comprehensive income (loss)
$
1,501

 
$
(5,314
)
 
$
(180
)
 
$
(3,993
)

Condensed Consolidated Statement of Comprehensive Income (Loss)
For the Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
3,656

 
$
(112
)
 
$

 
$
3,544

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains on cash flow hedges
4,365

 

 

 
4,365

Reclassification of net gains realized into net income (loss)
(64
)
 

 

 
(64
)
Total other comprehensive income
4,301

 

 

 
4,301

Total comprehensive income (loss)
$
7,957

 
$
(112
)
 
$

 
$
7,845


35

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 Loss
For the Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(7,224
)
 
$
(5,320
)
 
$
(180
)
 
$
(12,724
)
Other comprehensive loss:
 
 
 
 
 
 
 
Net unrealized losses on cash flow hedges
(161
)
 

 

 
(161
)
Reclassification of net gains realized into net loss
(193
)
 

 

 
(193
)
Total other comprehensive loss
(354
)
 

 

 
(354
)
Total comprehensive loss
$
(7,578
)
 
$
(5,320
)
 
$
(180
)
 
$
(13,078
)

Condensed Consolidated Statement of Comprehensive Loss
For the Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(15,677
)
 
$
(114
)
 
$

 
$
(15,791
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains on cash flow hedges
3,037

 

 

 
3,037

Reclassification of net gains realized into net loss
(63
)
 

 

 
(63
)
Total other comprehensive income
2,974

 

 

 
2,974

Total comprehensive loss
$
(12,703
)
 
$
(114
)
 
$

 
$
(12,817
)

36

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 Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
$
(7,224
)
 
$
(5,320
)
 
$
(180
)
 
$
(12,724
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
22,426

 
30

 

 
22,456

MSA Fee Waivers
7,400

 
3,646

 

 
11,046

Amortization of debt issuance costs, debt premium and original issue discounts
595

 

 

 
595

Loss on disposal of assets
350

 

 

 
350

Unit-based compensation
2,936

 
549

 

 
3,485

Fair value changes in derivatives
(346
)
 

 

 
(346
)
Unrealized loss on foreign currency transactions, net
29

 

 

 
29

Change in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts and insurance receivables
(4,163
)
 
(4
)
 

 
(4,167
)
Related-party receivables
(17,529
)
 
(2,012
)
 
17,005

 
(2,536
)
Prepaid expenses and other current and long-term assets
(139
)
 
(201
)
 

 
(340
)
Inventories
287

 
(305
)
 

 
(18
)
Derivatives
563

 

 

 
563

Accounts payable, accrued liabilities and other current liabilities
(2,449
)
 
(4,630
)
 

 
(7,079
)
Related-party payables and accrued liabilities
14,045

 
2,604

 
(17,005
)
 
(356
)
Accrued interest
(1,650
)
 
1,072

 

 
(578
)
Operating lease liabilities
(1,690
)
 
(782
)
 

 
(2,472
)
Other long-term liabilities
196

 
(542
)
 

 
(346
)
Net cash provided by (used in) operating activities
13,637


(5,895
)

(180
)
 
7,562

Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(30,823
)
 
(19,069
)
 

 
(49,892
)
Payment in relation to the Enviva Wilmington Holdings, LLC Drop-Down
(74,700
)
 

 

 
(74,700
)
Net cash used in investing activities
(105,523
)

(19,069
)


 
(124,592
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from long-term debt and finance lease obligations, net
92,248

 

 

 
92,248

Proceeds from common unit issuances
96,970

 

 

 
96,970

First JV Revolver
(22,850
)
 
22,850

 

 

Payment of deferred consideration for Enviva Port of Wilmington, LLC Drop-Down
(24,300
)
 

 

 
(24,300
)
Distributions to unitholders, distribution equivalent rights and incentive distribution rights holder
(43,473
)
 

 

 
(43,473
)
Payment for withholding tax associated with Long-Term Incentive Plan vesting
(1,870
)
 

 

 
(1,870
)
Net cash provided by financing activities
96,725

 
22,850

 

 
119,575

Net increase (decrease) in cash, cash equivalents and restricted cash
4,839

 
(2,114
)
 
(180
)
 
2,545

Cash, cash equivalents and restricted cash, beginning of period
(1,030
)
 
3,490

 

 
2,460

Cash, cash equivalents and restricted cash, end of period
$
3,809

 
$
1,376

 
$
(180
)
 
$
5,005



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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 Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
$
(15,677
)
 
$
(114
)
 
$

 
$
(15,791
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
19,439

 

 

 
19,439

Amortization of debt issuance costs, debt premium and original issue discounts
548

 

 

 
548

Loss on disposal of assets
244

 

 

 
244

Unit-based compensation
3,823

 

 

 
3,823

Fair value changes in derivatives
(2,923
)
 

 

 
(2,923
)
Unrealized loss on foreign currency transactions, net
29

 


 

 
29

Change in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts and insurance receivables
33,806

 

 

 
33,806

Related-party receivables
(4,052
)
 
(2,899
)
 
7,017

 
66

Prepaid expenses and other current and long-term assets
(297
)
 

 

 
(297
)
Inventories
(12,021
)
 

 

 
(12,021
)
Derivatives
(947
)
 

 

 
(947
)
Accounts payable, accrued liabilities and other current liabilities
8,435

 
1

 

 
8,436

Related-party payables and accrued liabilities
(546
)
 
4,118

 
(7,017
)
 
(3,445
)
Accrued interest
60

 

 

 
60

Other long-term liabilities
206

 

 

 
206

Net cash provided by operating activities
30,127

 
1,106

 

 
31,233

Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(5,879
)
 

 

 
(5,879
)
Insurance proceeds from property loss
1,130

 

 

 
1,130

Net cash used in investing activities
(4,749
)
 

 

 
(4,749
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from long-term debt and finance lease obligations, net
27,016

 

 

 
27,016

Proceeds from common unit issuances
241

 

 

 
241

Distributions to unitholders, distribution equivalent rights and incentive distribution rights holder
(36,469
)
 

 

 
(36,469
)
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
(1,665
)
 

 

 
(1,665
)
Net cash used in financing activities
(13,218
)
 

 

 
(13,218
)
Net increase in cash, cash equivalents and restricted cash
12,160

 
1,106

 

 
13,266

Cash, cash equivalents and restricted cash, beginning of period
524

 

 

 
524

Cash, cash equivalents and restricted cash, end of period
$
12,684

 
$
1,106

 
$

 
$
13,790



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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 subsidiaries Enviva MLP Holdco, LLC and Enviva Development Holdings, LLC) and references to our General Partner refer to Enviva Partners GP, LLC, a wholly owned subsidiary of Enviva Holdings, LP. References to “Enviva Management” refer to Enviva Management Company, LLC, a wholly owned subsidiary of Enviva Holdings, LP, and references to “our employees” refer to the employees of Enviva Management. References to the “First JV” refer to Enviva Wilmington Holdings, LLC, which is a joint venture between our sponsor and John Hancock Life Insurance Company (U.S.A.) and certain of its affiliates. References to the “Second JV” refer to a joint venture between our sponsor and John Hancock Life Insurance Company (U.S.A.) and certain of its affiliates.
The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis (“MD&A”) in Part II-Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission (the “SEC”). Our 2018 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 2018 Form 10-K and the factors described under “Cautionary Statement Regarding Forward-Looking Information” and Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q for information regarding certain risks inherent in our business.
Basis of Presentation
The following discussion about matters affecting the financial condition and results of operations of the Partnership should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report and the audited consolidated financial statements and related notes that are included in the 2018 Form 10-K. Among other things, those financial statements and the related notes include more detailed information regarding the basis of presentation for the following information.
Business Overview
We aggregate a natural resource, wood fiber, and process it into a transportable form, wood pellets. We sell a significant majority of our wood pellets through long-term, take-or-pay off-take contracts with creditworthy customers in the United Kingdom and Europe. We own and operate seven plants with a combined production capacity of over 3.5 million metric tons (“MT”) of wood pellets per year in Virginia, North Carolina, Mississippi, and Florida. In addition, we export wood pellets through our marine terminals at the Port of Chesapeake, Virginia (the “Chesapeake terminal”) and the Port of Wilmington, North Carolina (the “Wilmington terminal”) and from third-party marine terminals in Mobile, Alabama and Panama City, Florida. In April 2019, we acquired our sponsor’s interest the First JV. The First JV owns the Hamlet plant and a firm, 15-year take-or-pay off-take contract to supply nearly 1.0 million metric tons per year (“MTPY”) of wood pellets, following a ramp period. The Hamlet plant is now operating, and we expect the plant to exit 2019 with a production run-rate of approximately 500,000 MTPY and to reach its nameplate production capacity of approximately 600,000 MTPY in 2021. 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 strategy is to fully contract the wood pellet production from our plants under long-term, take-or-pay off-take contracts. During 2019, production capacity from our plants and wood pellets sourced from a production plant in Greenwood, South Carolina (the “Greenwood plant”) owned by the Second JV and from third parties are approximately equal to the contracted volumes under our existing long-term, take-or-pay off-take contracts. Our long-term, take-or-pay off-take contracts provide for sales of 2.9 million MT of wood pellets in 2019 and have a total weighted-average remaining term of 10.4 years from July 1, 2019. We intend to continue expanding our business by taking advantage of the growing demand for our product that is driven by conversion of coal-fired power generation and combined heat and power plants to co-fired or dedicated biomass-fired plants and construction of newly dedicated biomass-fired plants, principally in Europe and increasingly in Japan.
Recent Developments
Hamlet Transaction
In April 2019, we acquired from the sponsor all of the issued and outstanding Class B Units of the First JV for total consideration of $165.0 million, subject to certain adjustments (the “Hamlet Transaction”). The First JV owns the Hamlet plant

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and a firm, 15-year take-or-pay off-take contract to supply nearly one million MTPY of wood pellets, following a ramp period. The contract commences in 2019, ramps to full supply volumes in 2021 and continues through 2034. The Partnership already had off-take contracts with the First JV to supply 470,000 MTPY of the volumes to be supplied to the First JV prior to the Hamlet Transaction; as a result, the Partnership will have 500,000 MTPY in incremental sales volumes as a result thereof.
On the date of our acquisition of the sponsor’s Class B Units in the First JV:
We commenced an associated terminal services agreement to handle contracted volumes from the Hamlet plant.
We entered into an agreement with the sponsor, pursuant to which (1) the sponsor will pay us certain cash flows from the Hamlet plant until June 30, 2020, (2) the sponsor will reimburse us for construction cost overruns in excess of budgeted capital expenditures for the Hamlet plant, subject to certain exceptions, (3) we will pay to the sponsor quarterly incentive payments for any wood pellets produced by the Hamlet plant in excess of forecast production levels through June 30, 2020, and (4) the sponsor will retain liability for certain claims payable, if any, by the First JV (the “Make-Whole Agreement”).
The First JV entered into an agreement with Enviva Management to waive the obligation to pay an aggregate of approximately $2.7 million of management fees payable to Enviva Management under the First JV MSA with respect to the period from the date of acquisition until the later of July 1, 2019 and COD of the Hamlet plant (the “First JV MSA Fee Waiver”).
We entered into an agreement with Enviva Management to waive the obligation to pay an aggregate of approximately $13.0 million in fees payable under our management services agreement (the “EVA MSA,” and together with the First JV MSA, the “MSAs”) with Enviva Management with respect to the period from the date of the JV 1.0 Drop-Down through the second quarter of 2020 (the “EVA MSA Fee Waiver”).
We assumed the sponsor’s position as lender under a credit agreement between the First JV, as borrower, and the sponsor, as lender (the “First JV Revolver”).
We refer to these transactions as the “JV 1.0 Drop-Down.”
The purchase price of $165.0 million for the JV 1.0 Drop-Down consisted of (1) a cash payment of $24.7 million, net of a purchase price adjustment of $0.3 million, (2) the issuance of 1,681,237 unregistered common units at a value of $29.74, or $50.0 million of common units, (3) $50.0 million in cash paid on June 28, 2019, (4) $40.0 million in cash to be paid on January 2, 2020 and (5) the elimination of $3.7 million of net related-party receivables and payables included in the net assets on the date of acquisition. As the holder of the Class B Units, Enviva, LP became a member of the First JV (the “Enviva Member”) on the acquisition date.
Wilmington Terminal Second Payment
The Partnership made an initial payment of $56.0 million to the First JV as partial payment of the $130.0 million purchase price for the Wilmington terminal in October 2017 (the “Wilmington Acquisition”).
On April 1, 2019, the Partnership made the second and final payment of $74.0 million in deferred consideration for the Wilmington Acquisition consisting of 1,691,627 common units at a price of $29.38 per common unit (which was the 20-day volume-weighted average price as of the closing of the Wilmington Acquisition), or approximately $50.0 million in common units, subject to certain adjustments, and approximately $24.0 million in cash (the “Second Payment”).
Mid-Atlantic Expansions
During 2019, we expect to increase the aggregate wood pellet production capacity of our plants in Northampton, North Carolina and Southampton, Virginia (the “Mid-Atlantic Expansions”) by approximately 400,000 MTPY in the aggregate, subject to receiving the necessary permits. We expect to invest a total of approximately $130.0 million in additional wood pellet production assets and emissions control equipment for the expansions and to complete expansion activities in the first half of 2020 with startup shortly thereafter. Capital expenditures on the Mid-Atlantic Expansions through June 30, 2019 were approximately $44.5 million.
Financing Activities
In addition to the approximately $100.0 million in common units issued as partial consideration for the Hamlet Transaction and the Second Payment, the Partnership issued an aggregate of 3,508,778 common units to investors in exchange for proceeds

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of $100.0 million in a registered direct offering (the “RDO”) pursuant to an effective registration statement on file with the SEC at a purchase price of $28.50 per unit, representing a 4.2 percent discount to the 20-day volume-weighted average price as of March 20, 2019.
We used proceeds from the RDO, along with borrowings under the Partnership’s existing $350.0 million senior secured revolving credit facility and the common units issued as consideration for the Hamlet Transaction and the Second Payment, to partially finance (i) the $165.0 million purchase price for the Hamlet Transaction, (ii) the $74.0 million in deferred consideration for the Wilmington Acquisition, and will use proceeds to partially finance (iii) the $24.0 million in capital expenditures, net of payments under the Make-Whole Agreement, expected to be required to complete construction of the Hamlet plant and (iv) the approximately $130.0 million expected to be required for the Mid-Atlantic Expansions.
Contracted Backlog
As of August 5, 2019 we had approximately $9.6 billion of product sales backlog for firm contracted product sales to our long-term off-take customers and have a total weighted-average remaining term of 10.4 years, compared to approximately $5.8 billion and a total weighted-average remaining term of 9.0 years as of July 1, 2018. 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 August 5, 2019 forward rates. The contracted backlog includes forward prices including inflation, foreign currency and commodity prices. The amount also includes the effects of related foreign currency derivative contracts.
Our expected future product sales revenue under our contracted backlog as of August 5, 2019 is as follows (in millions):
Period from August 5, 2019 to December 31, 2019
$
298

Year ending December 31, 2020
913

Year ending December 31, 2021 and thereafter
8,340

Total product sales contracted backlog
$
9,551

Assuming all volumes under the firm and contingent off-take contracts held by our sponsor and the Second JV were included with our product sales backlog for firm contracted product sales, the total weighted-average remaining term as of August 5, 2019 would increase to 13.2 years and the product sales backlog would increase to $17.9 billion as follows (in millions):
Period from August 5, 2019 to December 31, 2019
$
298

Year ending December 31, 2020
913

Year ending December 31, 2021 and thereafter
16,685

Total product sales contracted backlog
$
17,896

Factors Impacting Comparability of Our Financial Results
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”). The Chesapeake terminal returned to operations on June 28, 2018. During the three and six months ended June 30, 2018, we incurred $20.3 million and $48.7 million, respectively, in costs as a result of the Chesapeake Incident related to asset impairment, inventory write-off and disposal costs, emergency response costs, asset repair costs and business continuity costs, the latter of which represented incremental costs to commission temporary wood pellet storage and handling and ship loading operations at nearby locations to meet our contractual obligations to our customers. As of June 30, 2018, we had recovered $26.3 million related to the Chesapeake Incident, which included $1.1 million of lost profits. As of December 31, 2018, $3.8 million of probable insurance recoveries for the then-remaining costs not yet recovered were included in insurance receivables; we received the $3.8 million in probable insurance recoveries (plus $0.5 million recognized as other income in 2019) in February 2019.
In addition, we incurred other losses and costs associated with the Chesapeake Incident during and since the three and six months ended June 30, 2018 and are pursuing outstanding claims of approximately $25.0 million related to such amounts. Consequently, our results of operations and cash flows, as well as our financial measures not presented in accordance with accounting principles generally accepted in the United States (“GAAP”), or non-GAAP financial measures, may not be comparable to those for reported periods before or after the three and six months ended June 30, 2018.

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How We Evaluate Our Operations
Adjusted Net (Loss) Income
We define adjusted net (loss) income as net (loss) income excluding certain expenses incurred related to the Chesapeake Incident and the Hurricane Events, consisting of emergency response expenses, expenses related to the disposal of inventory, and asset disposal and repair costs, offset by insurance recoveries received, certain non-cash waivers of fees for management services provided to us by our sponsor (collectively, “MSA Fee Waivers”), and interest expense associated with incremental borrowings related to the Chesapeake Incident. We believe that adjusted net (loss) income enhances investors’ ability to compare the past financial performance of our underlying operations with our current performance separate from certain items of gain or loss that we characterize as unrepresentative of our ongoing 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, changes in unrealized derivative instruments related to hedged items included in gross margin, MSA Fee Waivers, 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 and Hurricane Events, consisting of emergency response expenses, expenses related to the disposal of inventory, and asset disposal and repair costs, offset by insurance recoveries received. 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.
Adjusted EBITDA
We define adjusted EBITDA as net income or loss excluding depreciation and amortization, interest expense, income tax expense, early retirement of debt obligations, MSA Fee Waivers and 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 and Hurricane Events, 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 and Hurricane Events. 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.
Limitations of Non-GAAP Financial Measures
Adjusted net (loss) income, adjusted gross margin per metric ton, adjusted EBITDA, and distributable cash flow are not financial measures presented in accordance with 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 net (loss) income, 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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Results of Operations
Three Months ended June 30, 2019 Compared to Three Months ended June 30, 2018
 
Three Months ended June 30,
 
Change
 
Chesapeake Incident and Hurricane Events
 
Net Change
 
2019
 
2018
 
 
 
 
(in thousands)
 
 
 
 
Product sales
$
167,202

 
$
133,168

 
$
34,034

 
$

 
$
34,034

Other revenue (1)
877

 
2,428

 
(1,551
)
 

 
(1,551
)
Net revenue
168,079

 
135,596

 
32,483

 

 
32,483

Cost of goods sold, excluding depreciation and
   amortization (1)
140,476

 
105,967

 
34,509

 
522

 
33,987

Depreciation and amortization
11,096

 
9,818

 
1,278

 

 
1,278

Total cost of goods sold
151,572

 
115,785

 
35,787

 
522

 
35,265

Gross margin
16,507

 
19,811

 
(3,304
)
 
(522
)
 
(2,782
)
General and administrative expenses
2,241

 
3,829

 
(1,588
)
 

 
(1,588
)
Related-party management services agreement fee
8,789

 
3,458

 
5,331

 

 
5,331

Total general and administrative expenses
11,030

 
7,287

 
3,743

 

 
3,743

Income from operations
5,477

 
12,524

 
(7,047
)
 
(522
)
 
(6,525
)
Interest expense
(9,196
)
 
(9,047
)
 
(149
)
 

 
(149
)
Other (expense) income
(82
)
 
67

 
(149
)
 

 
(149
)
Net (loss) income
$
(3,801
)
 
$
3,544

 
$
(7,345
)
 
$
(522
)
 
$
(6,823
)
 
 
 
 
 
 
 
 
 
 
 (1) See Note 13, Related-Party Transactions
 
 
 
 
 
 
 
 
 
Product sales
Revenue related to product sales for wood pellets produced or procured by us increased to $167.2 million for the three months ended June 30, 2019 from $133.2 million for the three months ended June 30, 2018. The $34.0 million, or 26%, increase was primarily attributable to a 24% increase in sales volumes during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.
Other revenue
Other revenue decreased by $1.6 million during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease is primarily attributable to $1.2 million in fees received from a customer requesting scheduling accommodations during the three months ended June 30, 2018.
Cost of goods sold
Cost of goods sold increased to $151.6 million for the three months ended June 30, 2019 from $115.8 million for the three months ended June 30, 2018. The $35.8 million, or 31%, increase was primarily attributable to a 24% increase in sales volumes and a 5% increase in costs primarily due to seasonal factors that were more significant and longer lasting than during the three months ended June 30, 2018. These seasonal factors were largely behind us at the end of the second quarter.
Gross margin
Gross margin decreased to $16.5 million for the three months ended June 30, 2019 from $19.8 million for the three months ended June 30, 2018. The gross margin decrease of $3.3 million was primarily attributable to a $6.1 million increase in costs. The increase in costs was partially offset by a gross margin increase of $2.9 million due to a 24% increase in sales volumes during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.

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Adjusted gross margin per metric ton
 
Three Months ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands except per metric ton)
Reconciliation of gross margin to adjusted gross margin per metric ton:
 
 
 
 
 
Gross margin
$
16,507

 
$
19,811

 
$
(3,304
)
Loss on disposal of assets
350

 
244

 
106

Depreciation and amortization
11,096

 
9,818

 
1,278

Chesapeake Incident and Hurricane Events
(281
)
 
(804
)
 
523

Changes in unrealized derivative instruments
(2,334
)
 
(3,463
)
 
1,129

MSA Fee Waivers
2,700

 

 
2,700

Adjusted gross margin
$
28,038

 
$
25,606

 
$
2,432

Metric tons sold
869

 
699

 
170

Adjusted gross margin per metric ton
$
32.26

 
$
36.63

 
$
(4.37
)
We earned adjusted gross margin of $28.0 million, or $32.26 per MT, for the three months ended June 30, 2019. Adjusted gross margin was $25.6 million, or $36.63 per MT, for the three months ended June 30, 2018. The factors impacting the change in adjusted gross margin include those described above under the heading “Gross margin.” Additionally, adjusted gross margin increased during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 due to the waiver of $2.7 million of management services fees by the sponsor as consideration for an assignment of two shipping contracts to our sponsor to rebalance our and our sponsor’s respective shipping obligations under existing off-take contracts.
General and administrative expenses
General and administrative expenses were $11.0 million for the three months ended June 30, 2019 and $7.3 million for the three months ended June 30, 2018. The $3.7 million increase in general and administrative expenses is primarily attributable to the consolidation of the First JV following the JV 1.0 Drop-Down on April 2, 2019.
Interest expense
We incurred $9.2 million of interest expense during the three months ended June 30, 2019 and $9.0 million of interest expense during the three months ended June 30, 2018. The increase in interest expense was primarily attributable to an increase in borrowings under our senior secured revolving credit facility.
Adjusted net income
 
Three Months ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Reconciliation of net (loss) income to adjusted net income:
 
 
 
 
 
Net (loss) income
$
(3,801
)
 
$
3,544

 
$
(7,345
)
Chesapeake Incident and Hurricane Events
(281
)
 
(804
)
 
523

MSA Fee Waivers
11,046

 

 
11,046

Adjusted net income
$
6,964

 
$
2,740

 
$
4,224

We generated adjusted net income of $7.0 million for the three months ended June 30, 2019 and $2.7 million for the three months ended June 30, 2018. The $4.2 million increase in adjusted net income was primarily attributable to the factors described below under the heading “Adjusted EBITDA,” partially offset by a $1.3 million increase in depreciation and amortization expense and a $1.1 million increase in changes in unrealized derivative instruments.

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Adjusted EBITDA
 
Three Months ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Reconciliation of net (loss) income to adjusted EBITDA:
 
 
 
 
 
Net (loss) income
$
(3,801
)
 
$
3,544

 
$
(7,345
)
Add:
 
 
 
 
 
Depreciation and amortization
11,248

 
10,031

 
1,217

Interest expense
9,196

 
9,047

 
149

Non-cash unit compensation expense
1,013

 
2,480

 
(1,467
)
Asset impairments and disposals
350

 
244

 
106

Chesapeake Incident and Hurricane Events
(281
)
 
(804
)
 
523

Changes in the fair value of derivative instruments
(2,334
)
 
(3,463
)
 
1,129

MSA Fee Waivers
11,046

 

 
11,046

Acquisition costs
525

 
(7
)
 
532

Adjusted EBITDA
$
26,962

 
$
21,072

 
$
5,890

We generated adjusted EBITDA of $27.0 million for the three months ended June 30, 2019 compared to adjusted EBITDA of $21.1 million for the three months ended June 30, 2018. The $5.9 million increase was primarily attributable to the factors described above under the heading “Adjusted Gross margin per metric ton,” as well as $8.3 million of MSA Fee Waivers for general and administrative expenses.

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Distributable Cash Flow
The following is a reconciliation of adjusted EBITDA to distributable cash flow:
 
Three Months ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Adjusted EBITDA
$
26,962

 
$
21,072

 
$
5,890

Less:
 
 
 
 
 
Interest expense, net of amortization of debt issuance costs, debt premium, original issue discount and impact from incremental borrowings related to Chesapeake Incident and Hurricane Events
8,897

 
8,772

 
125

Maintenance capital expenditures
836

 
1,226

 
(390
)
Distributable cash flow attributable to Enviva Partners, LP
17,229

 
11,074

 
6,155

Less: Distributable cash flow attributable to incentive distribution rights
2,773

 
1,400

 
1,373

Distributable cash flow attributable to Enviva Partners, LP limited partners
$
14,456

 
$
9,674

 
$
4,782

Results of Operations
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
 
Six Months Ended June 30,
 
Change
 
Chesapeake Incident and Hurricane Events
 
Net Change
 
2019
 
2018
 
 
 
 
(in thousands)
 
 
 
 
Product sales
$
323,801

 
$
255,490

 
$
68,311

 
$

 
$
68,311

Other revenue (1)
2,647

 
5,430

 
(2,783
)
 

 
(2,783
)
Net revenue
326,448

 
260,920

 
65,528

 

 
65,528

Cost of goods sold, excluding depreciation and
   amortization (1)
277,868

 
227,005

 
50,863

 
(15,708
)
 
66,571

Depreciation and amortization
22,166

 
19,122

 
3,044

 

 
3,044

Total cost of goods sold
300,034

 
246,127

 
53,907

 
(15,708
)
 
69,615

Gross margin
26,414

 
14,793

 
11,621

 
15,708

 
(4,087
)
General and administrative expenses
7,865

 
6,577

 
1,288

 
391

 
897

Related-party management services agreement fee
13,002

 
7,514

 
5,488

 

 
5,488

Total general and administrative expenses
20,867

 
14,091

 
6,776

 
391

 
6,385

Income from operations
5,547

 
702

 
4,845

 
15,317

 
(10,472
)
Interest expense
(18,829
)
 
(17,692
)
 
(1,137
)
 
(490
)
 
(647
)
Other income
558

 
1,199

 
(641
)
 

 
(641
)
Net loss
$
(12,724
)
 
$
(15,791
)
 
$
3,067

 
$
14,827

 
$
(11,760
)
 (1) See Note 13, Related-Party Transactions
 
 
 
 
 
 
 
 
 
Product sales
Revenue related to product sales for wood pellets produced or procured by us increased to $323.8 million for the six months ended June 30, 2019 from $255.5 million for the six months ended June 30, 2018. The increase of $68.3 million, or 27%, was primarily attributable to a 27% increase in sales volumes during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.
Other revenue
Other revenue decreased by $2.8 million during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease is primarily attributable to $2.2 million in fees received from a customer requesting scheduling accommodations during the six months ended June 30, 2018.

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Cost of goods sold
Cost of goods sold increased to $300.0 million for the six months ended June 30, 2019 from $246.1 million for the six months ended June 30, 2018, an increase of $53.9 million, or 22%. Excluding the $22.4 million of expenses incurred during the six months ended June 30, 2018 related to the Chesapeake Incident, cost of goods sold would have increased by 34%, which is primarily attributable to a 27% increase in sales volumes during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.
Gross margin
Gross margin increased to $26.4 million for the six months ended June 30, 2019 from $14.8 million for the six months ended June 30, 2018. The gross margin increase of $11.6 million was primarily attributable to the following factors:
$22.4 million of expenses related to the Chesapeake Incident incurred during the six months ended June 30, 2018.
a $9.7 million increase due to a 27% increase in sales volumes during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.
Offsetting the above were:
A $9.0 million increase in costs primarily due to seasonal factors that were more significant and longer lasting than during the six months ended June 30, 2018
Costs in connection with a potential acquisition, discussed below under the heading “Adjusted gross margin per metric ton,” decreased gross margin by $4.2 million.
An increase in depreciation and amortization expense of $3.0 million.
A decrease in other revenue of $2.8 million as described above.
Adjusted gross margin per metric ton
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands except per metric ton)
Reconciliation of gross margin to adjusted gross margin per metric ton:
 
 
 
 
 
Gross margin
$
26,414

 
$
14,793

 
$
11,621

Loss on disposal of assets
350

 
244

 
106

Depreciation and amortization
22,166

 
19,122

 
3,044

Chesapeake Incident and Hurricane Events
78

 
15,786

 
(15,708
)
Changes in unrealized derivative instruments
(324
)
 
(2,694
)
 
2,370

MSA Fee Waivers
2,700

 

 
2,700

Acquisition costs
4,243

 

 
4,243

Adjusted gross margin
$
55,627

 
$
47,251

 
$
8,376

Metric tons sold
1,712

 
1,347

 
365

Adjusted gross margin per metric ton
$
32.49

 
$
35.08

 
$
(2.59
)
We earned adjusted gross margin of $55.6 million, or $32.49 per MT, for the six months ended June 30, 2019. Adjusted gross margin was $47.3 million, or $35.08 per MT, for the six months ended June 30, 2018. The factors impacting the change in adjusted gross margin include those described above under the heading “Gross margin,” offset by an increase of $3.0 million related to depreciation and amortization expense, a decrease of $15.7 million related to the Chesapeake Incident and Hurricane Events and an increase of $2.4 million related to changes in unrealized derivative instruments. Additionally, adjusted gross margin increased during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 due to the waiver of $2.7 million of management services fees from our sponsor as consideration for an assignment of two shipping contracts to our sponsor to rebalance our and our sponsor’s respective shipping obligations under existing off-take contracts. In addition, the six months ended June 30, 2019 includes $4.2 million of incremental costs, which are unrepresentative of our ongoing operations, in connection with our evaluation of a third-party wood pellet production plant we previously had considered, and were considering, purchasing (the “Potential Target”). When we commenced our review, the Potential Target had recently returned to operations following an extended shutdown during a bankruptcy proceeding with the intent of demonstrating

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favorable operations prior to proceeding to an auction sale process; however, the Potential Target had not yet established a logistics chain through a viable export terminal, given that the terminal through which the plant historically had exported was not operational at the time and was not reasonably certain to become operational in the future. Accordingly, as part of our diligence of the Potential Target, we developed an alternative logistics chain to bring the Potential Target’s wood pellets to market and began purchasing the production of the Potential Target for a trial period. The incremental costs associated with the establishment and evaluation of this new logistics chain primarily consist of barge, freight, trucking, storage and shiploading services. We have completed our evaluation of the alternative logistics chain and, therefore, do not expect to incur additional costs of this nature in the future.
General and administrative expenses
General and administrative expenses were $20.9 million for the six months ended June 30, 2019 and $14.1 million for the six months ended June 30, 2018. The $6.8 million increase in general and administrative expenses is primarily attributable to $5.3 million resulting from the consolidation of the First JV following the JV 1.0 Drop-Down on April 2, 2019, $1.2 million of transaction expenses related to the Hamlet Transaction and $0.4 million of legal fees related to the Chesapeake Incident.
Interest expense
We incurred $18.8 million of interest expense during the six months ended June 30, 2019 and $17.7 million of interest expense during the six months ended June 30, 2018. The increase in interest expense was primarily attributable to an increase in borrowings under our senior secured revolving credit facility.
Adjusted net loss
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Reconciliation of net loss to adjusted net loss:
 
 
 
 
 
Net loss
$
(12,724
)
 
$
(15,791
)
 
$
3,067

Chesapeake Incident and Hurricane Events
8

 
15,786

 
(15,778
)
MSA Fee Waivers
11,046

 

 
11,046

Interest expense from incremental borrowings related to Chesapeake Incident and Hurricane Events
490

 

 
490

Adjusted net loss
$
(1,180
)
 
$
(5
)
 
$
(1,175
)
We generated adjusted net loss of $1.2 million for the six months ended June 30, 2019. The $1.2 million increase in adjusted net loss was attributable to the $15.8 million decrease in adjustments related to the Chesapeake Incident and Hurricane Events, offset by MSA Fee Waivers of $11.0 million and a $3.1 million, decrease in net loss primarily attributable to the factors described above.
Adjusted EBITDA
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Reconciliation of net loss to adjusted EBITDA:
 
 
 
 
 
Net loss
$
(12,724
)
 
$
(15,791
)
 
$
3,067

Add:
 
 
 
 
  

Depreciation and amortization
22,456

 
19,439

 
3,017

Interest expense
18,829

 
17,692

 
1,137

Non-cash unit compensation expense
3,485

 
3,823

 
(338
)
Asset impairments and disposals
350

 
244

 
106

Chesapeake Incident and Hurricane Events
8

 
15,786

 
(15,778
)
Changes in the fair value of derivative instruments
(324
)
 
(2,694
)
 
2,370

MSA Fee Waivers
11,046

 

 
11,046

Acquisition costs
5,452

 
146

 
5,306

Adjusted EBITDA
$
48,578

 
$
38,645

 
$
9,933


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We generated adjusted EBITDA of $48.6 million for the six months ended June 30, 2019 compared to adjusted EBITDA of $38.6 million for the six months ended June 30, 2018. The $9.9 million increase was primarily attributable to the factors described above under the heading “Gross margin,” including the $5.4 million of expenses incurred, net of insurance recoveries, related to business continuity activities following the Chesapeake Incident during the three months ended June 30, 2018 as well as the $4.2 million in acquisition costs described above under the heading “Adjusted gross margin per metric ton” and an additional $1.2 million in costs, primarily in legal fees related to the Hamlet Transaction.
Distributable Cash Flow
The following is a reconciliation of adjusted EBITDA to distributable cash flow:
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Adjusted EBITDA
$
48,578

 
$
38,645

 
$
9,933

Less:
 
 
 
 
  

Interest expense, net of amortization of debt issuance costs, debt premium, original issue discount and impact from incremental borrowings related to Chesapeake Incident and Hurricane Events
17,745

 
17,145

 
600

Maintenance capital expenditures
1,764

 
1,614

 
150

Distributable cash flow attributable to Enviva Partners, LP
29,069

 
19,886

 
9,183

Less: Distributable cash flow attributable to incentive distribution rights
5,043

 
2,664

 
2,379

Distributable cash flow attributable to Enviva Partners, LP limited partners
$
24,026

 
$
17,222

 
$
6,804


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 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.
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 unit per quarter, which equates to approximately $13.8 million per quarter, or approximately $55.2 million per year, based on the number of common units outstanding as of June 30, 2019.
Capital Requirements
We operate in a capital-intensive industry, which requires significant investments to maintain and upgrade existing capital assets. Our capital requirements have consisted, and we anticipate will continue to consist, primarily 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.

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We expect to invest approximately $130.0 million in additional production assets and emissions control equipment for the Mid-Atlantic Expansions. We expect to complete construction in the first half of 2020, subject to receiving the necessary permits, with startup shortly thereafter.
Cash Flows
The following table sets forth a summary of our net cash flows from operating, investing and financing activities for the six months ended June 30, 2019 and 2018, respectively:
 
Six Months Ended June 30,
 
2019
 
2018
 
(in thousands)
Net cash provided by operating activities
$
7,562

 
$
31,233

Net cash used in investing activities
(124,592
)
 
(4,749
)
Net cash provided by (used in) financing activities
119,575

 
(13,218
)
Net increase in cash, cash equivalents and restricted cash
$
2,545

 
$
13,266

Cash Provided by Operating Activities
Net cash provided by operating activities was $7.6 million for the six months ended June 30, 2019 compared to $31.2 million for the six months ended June 30, 2018. The decrease of $23.7 million was largely due to changes in working capital, primarily attributable to the Chesapeake Incident during the six months ended June 30, 2018.
Cash Used in Investing Activities
Net cash used in investing activities was $124.6 million for the six months ended June 30, 2019 compared to $4.7 million for the six months ended June 30, 2018. The $119.8 million increase is primarily due to the payment of $74.7 million in connection with the JV 1.0 Drop-Down. The $49.9 million of cash used for property, plant and equipment during the six months ended June 30, 2019 includes approximately $43.0 million of capital expenditures related to the Hamlet plant and the Mid-Atlantic Expansions, $5.1 million related to projects intended to increase the operating income or operating capacity of our plants and $1.8 million of capital expenditures to maintain operations.
Cash Used in Financing Activities
Net cash provided by financing activities was $119.6 million for the six months ended June 30, 2019 compared to net cash used in financing activities of $13.2 million for the six months ended June 30, 2018. The net cash provided by financing activities primarily consisted of approximately $97.0 million in issued common units and $93.5 million of borrowings under our senior secured revolving credit facility, net, during the six months ended June 30, 2019. Net cash provided by financing activities was offset by $43.5 million of distributions paid to our unitholders and by the payment of $24.3 million of deferred consideration for the Wilmington Drop-Down
Net cash used in financing activities for the six months ended June 30, 2018 primarily consisted of $36.5 million of distributions paid to our unitholders, $2.3 million paid to the General Partner to purchase performance-based phantom units for the LTIP and $1.7 million paid to satisfy the withholding tax requirements associated with the LTIP vesting. Net cash used in financing activities was offset by $30.0 million of borrowings under our senior secured revolving credit facility, net, during the six months ended June 30, 2018.
Off-Balance Sheet Arrangements
As of June 30, 2019, 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 2018 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, 2018.

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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, 2018 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 June 30, 2019, we had notional amounts of 35.9 million GBP and 7.0 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 2019 and 2023.
We do not utilize foreign exchange contracts for speculative or trading purposes. The counterparties to our foreign exchange contracts are major financial institutions.
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 June 30, 2019.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2019, 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, 2018.
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, 2018 or our Quarterly Report on Form 10-Q for the three months ended March 31, 2019.

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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
 

 
 
2.1

 
3.1

 
3.2

 
3.3

 
4.1*

 

10.1

 
10.2

 
10.3

 
10.4

 
10.5

 
Make-Whole Agreement by and between Enviva Holdings, LP and Enviva, LP dated April 2, 2019 (Exhibit 10.5, Form 10-Q filed May 9, 2019, File No. 001-37363)
31.1*

 
31.2*

 
32.1**

 
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: August 7, 2019
 
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)

54