S-1 1 d808391ds1.htm S-1 S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on October 27, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Enviva Partners, LP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2400   46-4097730
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

7200 Wisconsin Ave, Suite 1000

Bethesda, MD 20814

(301) 657-5560

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

William H. Schmidt, Jr.

7200 Wisconsin Ave, Suite 1000

Bethesda, MD 20814

(301) 657-5560

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Mike Rosenwasser

E. Ramey Layne

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, New York 10103

Tel: (212) 237-0000

Fax: (212) 237-0100

 

Sean T. Wheeler

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

Tel: (713) 546-5400

Fax: (713) 546-5401

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common units representing limited partner interests

  $100,000,000   $11,620

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated October 27, 2014

PROSPECTUS

 

 

LOGO

Enviva Partners, LP

Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units representing limited partner interests. We are offering              common units. No public market currently exists for our common units.

We have been invited to apply to list our common units on the New York Stock Exchange under the symbol “EVA.”

We anticipate that the initial public offering price will be between $             and $             per common unit.

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 23.

These risks include the following:

 

  We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.
  On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for each quarter in the year ended December 31, 2013 and the twelve months ended June 30, 2014.
  We derive substantially all of our revenues from customers in Northern Europe. If we fail to diversify our customer base in the future, our results of operations, business and financial position and ability to make cash distributions could be materially adversely affected.
  Changes in government policies, incentives and taxes implemented to support increased generation of low-carbon and renewable energy may affect customer demand for our products.
  The international nature of our business subjects us to a number of risks, including unfavorable political, regulatory and tax conditions in foreign countries.
  The growth of our business depends in part upon locating and acquiring interests in additional production plants and deep-water marine terminals at favorable prices.
  Enviva Holdings, LP owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Enviva Holdings, LP, have conflicts of interest with us and limited duties, and they may favor their own interests to our detriment and that of our unitholders.
  Unitholders will experience immediate and substantial dilution of $         per common unit.
  There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.
  Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution to you would be substantially reduced.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933 and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors” and “Summary—Emerging Growth Company Status.”

 

     Per Common Unit      Total  

Public Offering Price

   $                    $                

Underwriting Discount

   $         $     

Proceeds to Enviva Partners, LP (before expenses)

   $         $     

The underwriters may purchase up to an additional              common units from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus if the underwriters sell more than                  common units in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

 

 

Barclays                    Goldman, Sachs & Co.            RBC Capital Markets              Citigroup   

Prospectus dated                     , 2014


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[ARTWORK TO COME]


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You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us or any other information to which we have referred you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy our common units in any circumstances under which the offer or solicitation is unlawful.

TABLE OF CONTENTS

 

SUMMARY

     1   

Overview

     1   

Our Assets and Operations

     1   

Our Growth Strategy

     3   

Industry Overview

     5   

Business Strategies

     6   

Competitive Strengths

     6   

Risk Factors

     8   

Our Management

     8   

About Our Sponsor

     8   

Our Sponsor’s Owners

     8   

Summary of Conflicts of Interest and Fiduciary Duties

     9   

Principal Executive Offices

     9   

Emerging Growth Company Status

     9   

The Transactions

     10   

Organizational Structure

     11   

The Offering

     13   

Summary Historical Consolidated and Unaudited Pro Forma Financial and Operating Data

     18   

Non-GAAP Financial Measures

     21   

RISK FACTORS

     23   

Risks Inherent in Our Business

     23   

Risks Inherent in an Investment in Us

     36   

Tax Risks to Common Unitholders

     46   

USE OF PROCEEDS

     51   

CAPITALIZATION

     52   

DILUTION

     53   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     55   

General

     55   

Our Minimum Quarterly Distribution

     57   

Subordinated Units

     57   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December  31, 2013 and the Twelve Months Ended June 30, 2014

     58   

Estimated Cash Available for Distribution for the Twelve Months Ending December 31, 2015

     61   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

     66   

General

     66   

Operating Surplus and Capital Surplus

     66   

Capital Expenditures

     68   

Subordination Period

     69   

 

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Distributions From Operating Surplus During the Subordination Period

     71   

Distributions From Operating Surplus After the Subordination Period

     71   

General Partner Interest

     72   

Incentive Distribution Rights

     72   

Percentage Allocations of Distributions From Operating Surplus

     72   

Incentive Distribution Right Holders’ Right to Reset Incentive Distribution Levels

     73   

Distributions From Capital Surplus

     75   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     76   

Distributions of Cash Upon Liquidation

     76   

SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA

     79   

Non-GAAP Financial Measures

     81   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     84   

Basis of Presentation

     84   

Business Overview

     84   

How We Evaluate Our Operations

     85   

Factors Impacting Comparability of Our Financial Results

     85   

How We Generate Revenue

     88   

Costs of Conducting Our Business

     89   

Results of Operations

     90   

Liquidity and Capital Resources

     97   

Cash Flows

     98   

Senior Secured Credit Facilities

     100   

Contractual Obligations

     102   

Quantitative and Qualitative Disclosure of Market Risks

     103   

Internal Controls and Procedures

     104   

Recent Accounting Pronouncements

     104   

Critical Accounting Policies and Estimates

     105   

INDUSTRY OVERVIEW

     108   

Introduction

     108   

Global Demand for Utility-Grade Wood Pellets

     110   

Global Supply of Utility-Grade Wood Pellets

     117   

Forecast of the Utility-Grade Wood Pellet Supply-Demand Gap

     121   

BUSINESS

     122   

Overview

     122   

Business Strategies

     123   

Competitive Strengths

     124   

Our History

     126   

Our Assets

     126   

Our Growth Strategy

     130   

Customers

     132   

Production Process and Costs

     134   

Competition

     140   

Our Management and Employees

     140   

Environmental Matters

     141   

Safety and Maintenance

     143   

Seasonality

     144   

Principal Executive Offices

     144   

Legal Proceedings

     144   

 

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MANAGEMENT

     145   

Management of Enviva Partners, LP

     145   

Executive Officers and Directors of Our General Partner

     146   

Director Independence

     150   

Committees of the Board of Directors

     150   

Executive Compensation

     151   

Long-Term Incentive Plan

     153   

Director Compensation

     155   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     157   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     158   

Distributions and Payments to Our General Partner and Its Affiliates

     158   

Agreements with Affiliates in Connection with the Transactions

     159   

Other Transactions with Related Persons

     160   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     162   

Summary of Applicable Duties

     162   

Conflicts of Interest

     162   

Fiduciary Duties

     167   

DESCRIPTION OF THE COMMON UNITS

     170   

The Units

     170   

Transfer Agent and Registrar

     170   

Transfer of Common Units

     170   

THE PARTNERSHIP AGREEMENT

     172   

Organization and Duration

     172   

Purpose

     172   

Cash Distributions

     172   

Capital Contributions

     172   

Voting Rights

     173   

Applicable Law; Forum, Venue and Jurisdiction

     174   

Limited Liability

     174   

Issuance of Additional Interests

     175   

Amendment of the Partnership Agreement

     176   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     178   

Dissolution

     178   

Liquidation and Distribution of Proceeds

     179   

Withdrawal or Removal of Our General Partner

     179   

Transfer of General Partner Interest

     180   

Transfer of Ownership Interests in the General Partner

     180   

Transfer of Subordinated Units and Incentive Distribution Rights

     180   

Change of Management Provisions

     181   

Limited Call Right

     181   

Non-Taxpaying Holders; Redemption

     182   

Non-Citizen Assignees; Redemption

     182   

Meetings; Voting

     182   

Voting Rights of Incentive Distribution Rights

     183   

Status as Limited Partner

     183   

Indemnification

     183   

Reimbursement of Expenses

     184   

Books and Reports

     184   

 

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Right to Inspect Our Books and Records

     184   

Registration Rights

     185   

UNITS ELIGIBLE FOR FUTURE SALE

     186   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     188   

Taxation of the Partnership

     188   

Tax Consequences of Unit Ownership

     190   

Tax Treatment of Operations

     194   

Disposition of Units

     195   

Uniformity of Units

     197   

Tax-Exempt Organizations and Other Investors

     197   

Administrative Matters

     198   

State, Local and Other Tax Considerations

     200   

INVESTMENT IN ENVIVA PARTNERS, LP BY EMPLOYEE BENEFIT PLANS

     201   

General Fiduciary Matters

     201   

Prohibited Transaction Issues

     201   

Plan Asset Issues

     202   

UNDERWRITING

     203   

Commissions and Expenses

     203   

Option to Purchase Additional Common Units

     203   

Lock-Up Agreements

     204   

Offering Price Determination

     204   

Indemnification

     205   

Stabilization, Short Positions and Penalty Bids

     205   

Electronic Distribution

     206   

New York Stock Exchange

     206   

Discretionary Sales

     206   

Stamp Taxes

     206   

Relationships

     206   

FINRA

     207   

Selling Restrictions

     207   

VALIDITY OF OUR COMMON UNITS

     210   

EXPERTS

     210   

WHERE YOU CAN FIND MORE INFORMATION

     210   

FORWARD-LOOKING STATEMENTS

     212   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF ENVIVA PARTNERS, LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

 

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INDUSTRY AND MARKET DATA

The data included in this prospectus regarding the utility-grade wood pellet industry, including trends in the market and our position and the position of our competitors within the industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in the areas in which our business operates. The sources of the industry and market data used herein are the most recent data available to management and therefore management believes such data to be reliable. We commissioned Hawkins Wright, an independent market consultant with expertise in the international forest products and bioenergy industries, to assist in the preparation of the “Industry Overview” section of this prospectus, but we have not funded, nor are we otherwise affiliated with, any other third-party source cited herein. Any data sourced from Hawkins Wright is used with the express written consent of Hawkins Wright.

Estimates of market size and relative positions in a market are difficult to develop and inherently uncertain. Accordingly, investors should not place undue weight on the industry and market share data presented in this prospectus.

CURRENCY INFORMATION

In this prospectus, references to “$”, “US$” and “dollars” are to U.S. Dollars, the lawful currency of the United States. References to “£” are to the pound sterling, the lawful currency of the United Kingdom. References to “yen” are to the Japanese yen, the lawful currency of Japan.

CERTAIN REFERENCES IN THIS PROSPECTUS

References in this prospectus to “Enviva Partners, LP Predecessor,” “our predecessor,” “we,” “our,” “us” or like terms when used in a historical context refer to Enviva, LP and its subsidiaries, which entities Enviva Holdings, LP is contributing to Enviva Partners, LP in connection with this offering (other than Enviva Pellets Southampton, LLC, which Enviva Holdings, LP will retain). When used in the present tense or prospectively, “we,” “our,” “us” or like terms refer to Enviva Partners, LP and its subsidiaries. References in this prospectus to “Enviva Holdings” and “our sponsor” refer to Enviva Holdings, LP, together with its wholly owned subsidiary Enviva MLP Holdco, LLC. References in this prospectus to “our general partner” refer to Enviva Partners GP, LLC, a wholly owned subsidiary of Enviva Holdings, LP. References in this prospectus to “Enviva Management” refer to Enviva Management Company, LLC, an entity wholly-owned by Enviva Holdings, LP and its affiliates, and references to “our employees” refer to the employees of Enviva Management. References to the “Riverstone Funds” refer to Riverstone/Carlyle Renewable and Alternative Energy Fund II, L.P. and certain affiliated entities, collectively, and references to “Riverstone” refer to Riverstone Holdings LLC. Please see page 11 for a simplified diagram of our ownership structure after giving effect to this offering and the related transactions. We include a glossary of some of the terms used in this prospectus as Appendix B.

Our sponsor acquired Green Circle Bio Energy, Inc. (“Green Circle”) in             , 2014 and will contribute it to us in connection with this offering. Upon the closing of the acquisition, our sponsor converted Green Circle into a Delaware limited liability company and changed the name of the entity to “Enviva Pellets Cottondale, LLC.” References in this prospectus to “Enviva Cottondale” refer to Enviva Pellets Cottondale, LLC. When used in the present tense or prospectively, “our production plants,” “our plants” or like terms refer to the production plants owned by Enviva, LP and its subsidiaries, including Enviva Cottondale.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical consolidated financial statements and the notes to those consolidated financial statements, before investing in our common units. The information presented in this prospectus assumes an initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and, unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” for information about important risks that you should consider before buying our common units.

Enviva Partners, LP

Overview

We are the world’s largest supplier by production capacity of utility-grade wood pellets to major power generators. Since our entry into this business in 2010, we have executed multiple long-term, take-or-pay off-take contracts with creditworthy customers and have built and acquired the production and terminaling capacity necessary to serve them. We are larger than any of our competitors and our existing production constitutes approximately 16% of current global utility-grade wood pellet supply. We own and operate five production plants in the Southeastern U.S. that have a combined wood pellet production capacity of 1.7 million metric tons per year (“MTPY”). Two of our production plants are new facilities that we constructed using our templated design and standardized equipment. A third plant, our largest in terms of production capacity, has been in operation since 2008. We also own a dry-bulk, deep-water marine terminal at the Port of Chesapeake (the “Chesapeake terminal”) that reduces our storage and shiploading costs and enables us to reliably supply our customers. All of our facilities are located in geographic regions with low input costs and favorable transportation logistics. Owning these cost-advantaged, fully-contracted assets 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.

Demand for utility-grade wood pellets is expected to grow at a compound annual growth rate (“CAGR”) of 21% from 2013 to 2020, according to Hawkins Wright. This growth is being driven by the conversion of coal-fired power generation and combined heat and power plants to co-fired or dedicated biomass-fired plants, principally in Northern Europe and, increasingly, in South Korea and Japan. These conversions are attractive due to a combination of factors: they enable power generators to profitably extend the permitted lives of plants that provide critical baseload power generation; they help countries meet regulations regarding greenhouse gas (“GHG”) emissions and renewable energy usage; and they can be implemented quickly and cost-effectively relative to other sources of renewable energy. Our sponsor, a portfolio company of the Riverstone Funds, owns a newly built, fully-contracted production plant, the Southampton plant, and will grant us a right of first offer to acquire this plant and other fully-contracted production plants and associated deep-water marine terminals it is currently developing to serve new customer contracts, as well as any similar assets it may develop in the future.

We believe our strategy to operate fully-contracted, industrial-scale and cost-advantaged production plants and to control critical delivery infrastructure will enable us to maintain and grow our distributions to unitholders. We intend to make minimum quarterly distributions of $             per unit ($             per unit on an annualized basis) and believe our long-term, take-or-pay off-take contracts will support our ability to make such distributions. In addition, we expect our growth strategy, which is focused on acquiring fully-contracted replicas of our long-lived production plants and deep-water marine terminals from our sponsor, will produce stable and growing cash flows and allow us to increase our per-unit distributions over time.

Our Assets and Operations

We are a vertically integrated producer and distributor of utility-grade wood pellets. We procure wood fiber, a plentiful natural resource, from thousands of landowners and other suppliers, dry and process that fiber into wood pellets at our production plants and transport those products to deep-water marine terminals where they are

 

 

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stored and then distributed to our customers. We own five industrial-scale production plants located in geographic areas in which wood fiber resources are plentiful and readily available. These production plants have a combined wood pellet production capacity of approximately 1.7 million MTPY, representing approximately 18.7% of total European market demand in 2013. We acquired our first production plant in Amory, MS in late 2010 and, with modest incremental capital, quickly expanded its production by approximately 300%. Shortly thereafter, we acquired our second production plant in Wiggins, MS and we more than doubled its production during the ensuing year. Our experience in engineering, expanding and operating these assets helped prepare us to design, construct and commission our first new-build production plant on a former sawmill site in Ahoskie, NC. The Ahoskie plant’s design and standardized set of processing equipment became the basis for our “build-and-copy” approach, which we successfully employed in 2012 and 2013 to construct our production plant in Northampton, NC and our sponsor’s Southampton plant. Our sponsor acquired our Cottondale plant in                      2014.

The following table provides an overview of the production plants that we will own upon the closing of this offering:

 

Plant Location

   Operations
Commenced
   Annual Production
(MTPY)
 
Amory, MS    August 2010(1)      110,000   
Wiggins, MS    October 2010(1)      110,000   
Ahoskie, NC    November 2011      370,000   
Northampton, NC    April 2013      500,000   

Cottondale, FL (2)

   April 2008      650,000   
     

 

 

 

Total

     1,740,000   
     

 

 

 

 

(1) Represents the date of acquisition of the plant.
(2) Our sponsor’s acquisition of the Cottondale plant closed in                      2014 and the plant was contributed to us in connection with this offering.

Production from our Ahoskie and Northampton plants and our sponsor’s Southampton plant is exported from our Chesapeake terminal, which includes two purpose-built concrete storage domes with specialized product quality and safety control technologies. We export the production of our Amory and Wiggins plants from a third-party deep-water marine terminal in Mobile, AL (the “Mobile terminal”) under a long-term contract. At the Mobile terminal, flexible barge-based storage and shiploading provide a cost-effective solution for the smaller product volumes we produce in that region. Production from the Cottondale plant is exported from a third-party terminal in Panama City, FL (the “Panama City terminal”) under a long-term services contract.

We have U.S. dollar-denominated, take-or-pay off-take contracts with creditworthy counterparties, including large European power generators such as E.ON UK PLC (“E.ON”), Drax Power Limited (“Drax”) and GDF SUEZ Energy Management Trading (“GDF”). Under our existing off-take contracts, we are required to deliver pellet quantities approximately equal to all of the production capacity of our production plants plus the pellets we will purchase from our sponsor (as described below) through 2016. From 2017 through 2021, our contracted quantities are more than half of the production capacity of our production plants. Our off-take contracts provide for sales of 2.2 million MT of wood pellets in 2015 and have a weighted average remaining term of 6.1 years from January 1, 2015. Each contract provides for a base price subject to an annual inflation-based adjustment or price escalator. The majority of our production is sold under contracts that include cost pass-through mechanisms to mitigate increases in raw material and distribution costs. As our current off-take contracts expire, we will seek to recontract our capacity with a combination of renewals with existing customers, the assumption of additional contracts from our sponsor and the entry into contracts with new customers. As described under “—Our Growth Strategy” below, we believe global demand for utility-grade wood pellets will

 

 

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increase substantially, and we and our sponsor are in active discussions with prospective customers for contracts for substantial incremental production volumes.

We are able to maintain a low and stable cost structure due to the location of our production plants, our control of key infrastructure in our supply chain, our industrial-scale operations, our operating expertise and the standardization of our assets. Our production plants are strategically located in the Southeastern U.S., which gives us access to plentiful, low-cost wood fiber. Our in-house procurement team has established supplier relationships that enable us to reliably procure low-cost raw materials. In addition, our ownership of the Chesapeake terminal enables us to significantly reduce our shipping and logistics costs, and our long-term, fixed-price shipping contracts further stabilize our cost position. Our industrial-scale operations give us economies of scale, and our operating expertise allows us to lower manufacturing costs. The use of common equipment across our production plants enables us to maintain regional spare parts inventories and to develop cost-efficient training programs. We believe that our low-cost structure results in a high operating margin relative to others in our industry.

Our Growth Strategy

According to Hawkins Wright, an independent market consultant with expertise in the international forest products and bioenergy industries, global demand for utility-grade wood pellets is projected to expand at a CAGR of approximately 21% from 9.9 million MTPY in 2013 to 38.0 million MTPY in 2020, primarily as a result of demand growth in Northern Europe, South Korea and Japan. Given the limited current supply available, a substantial amount of new production capacity and related infrastructure will be required to meet this demand. As the largest supplier by production capacity in the industry, and because of our relationships with major Northern European and Asian customers, we believe that we are well positioned to capture a significant portion of this expected future demand growth.

There are several opportunities for us to grow our business and increase our cash available for distribution. First, we expect to increase cash flow from existing assets and improve our margins through increased scale and optimization in the operation of our production plants and within our supply chain. Second, to promote our growth, our sponsor will grant us a right of first offer to acquire the Southampton plant, the Wilmington Projects discussed below and any other wood pellet production plants and associated deep-water marine terminals that it may develop in the future. Third, we will continue to seek to grow our business through third-party acquisitions. As with the acquisition of our Cottondale plant, we intend to pursue future acquisition opportunities only when they are supported by our own or acquired long-term off-take contracts, and we do not plan to acquire assets that are in development or early stages of construction. We also intend to capitalize on our existing relationships with customers to capture a significant portion of growing worldwide demand. Our sales force is in active contract negotiations with creditworthy counterparties for additional long-term supply. We also opportunistically acquire wood pellets in the Pacific Northwest for sale in Asian markets, and we expect to continue to expand our geographic reach to serve South Korean and Japanese demand. In addition, the wood pellets produced from our Cottondale plant are suitable for uses other than industrial power generation, including commercial and residential heating. The Cottondale plant has already delivered production into this market and has several cargoes contracted for 2015 and beyond. We will continue to evaluate these markets as they develop and will pursue favorable sales opportunities.

Our Sponsor’s Retained Assets and Development Projects

Upon the closing of this offering, we will enter into a Purchase Rights Agreement with our sponsor, pursuant to which our sponsor will grant us a right of first offer to acquire the Southampton plant, the Wilmington Projects discussed below and any other wood pellet production plants and associated deep-water marine terminals that it may develop in the future. We expect to pursue the acquisition of such assets to the

 

 

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extent that they are supported by the long-term off-take contracts discussed below or other long-term off-take contracts with creditworthy counterparties and will have long useful lives, stable cost positions and advantaged locations. The Southampton plant and the plants comprising the Wilmington Projects will have an aggregate production capacity of 2.0 million MTPY, and our acquisition of these assets would more than double our production capacity.

Long-Term, Take-or-Pay Off-Take Contracts

Our sponsor has entered into two additional take-or-pay off-take contracts comprising nearly one million MTPY of long-duration sales volumes.

First, our sponsor has entered into a ten-year take-or-pay off-take contract with Drax pursuant to which it will supply 385,000 MTPY for the first delivery year and 500,000 MTPY for years two through ten. Subject to satisfying a condition precedent regarding the financing of a portion of the Wilmington Projects, this contract will commence on December 1, 2015.

Second, our sponsor has entered into a ten-year take-or-pay off-take contract with DONG Energy Thermal Power A/S, a Danish power generator (“DONG Energy”). This contract commences September 1, 2016 and provides for sales of 360,000 MTPY for the first delivery year and 420,000 MTPY for years two through ten. DONG Energy’s obligations under the contract are guaranteed by DONG Energy A/S.

In addition to these contracts, our sponsor’s sales force is in active contract negotiations with creditworthy counterparties for additional long-term supply.

Southampton Plant

We completed construction of a 510,000 MTPY production plant in Southampton, VA in October 2013 using the same “build-and-copy” approach employed to construct our Northampton plant. Prior to the closing of this offering, the entity that owns the Southampton plant will be distributed to our sponsor. Production from the Southampton plant is exported from our Chesapeake terminal. Prior to the closing of this offering, we will enter into a purchase agreement pursuant to which our sponsor will sell to us, on a fixed-price basis, approximately 42,000 MT of pellets per month through November 2015, approximately 80,000 MT during the three months from December 2015 through February 2016, and approximately 35,000 MT during the three months from March 2016 through May 2016. We expect that our sponsor will source these pellets from the production at its Southampton plant. We will sell the pellets we purchase from our sponsor to our customers under our existing off-take contracts.

Wilmington Projects

Our sponsor is developing three new 500,000 MTPY production plants and deep-water marine terminal capacity in the Wilmington, NC region, which we refer to as the Wilmington Projects. Our sponsor owns the plant site for the first production plant, has obtained rights to the real estate on which the second and third production plants are expected to be constructed and has entered into a long-term lease agreement that will enable it to construct a deep-water marine terminal at the Port of Wilmington in Wilmington, NC. Our sponsor has completed the permitting process for the terminal, is nearing completion of the permitting process for the first production plant and will file the primary permit application for the second production plant in the near future. For the first production plant and the terminal, our sponsor has also completed substantially all preliminary engineering, has entered into procurement contracts with third-party vendors for most of the major equipment and has commenced detailed engineering. Our sponsor expects the first plant and the terminal to begin commercial operations in late 2015. The three production plants, which are strategically sited in attractive fiber baskets in close proximity to the associated terminal, will be constructed using substantially the same design and equipment as the Northampton and

 

 

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Southampton plants. Our sponsor intends to use the net proceeds from this offering to finance the construction of a portion of the Wilmington Projects consisting of the first production plant and the terminal. Our sponsor believes that these proceeds will be sufficient to complete this initial phase of the Wilmington Projects.

Other Development Projects

In addition to the Wilmington Projects, our sponsor is pursuing the development of additional deep-water marine terminals and production plants. Our sponsor has entered into a Memorandum of Understanding with the Mississippi Development Authority regarding the development of new dry-bulk storage and deep-water terminaling capacity for wood pellets in the Port of Pascagoula, MS, which would service new, regionally proximate production plants, including one production plant in Lucedale, MS. In addition, our sponsor has signed a letter of intent with Port St. Joe, FL regarding the development of additional pellet export capacity at that port facility.

Although we expect to have the opportunity to acquire assets, including the Southampton plant and Wilmington Projects, from our sponsor in the future, there can be no assurance that our sponsor will be successful in completing its development projects or that it will decide to sell those projects to us.

Industry Overview

Our principal product, utility-grade wood pellets, is becoming a global energy commodity. Worldwide demand for utility-grade wood pellets is projected by Hawkins Wright to grow from 9.9 million MTPY in 2013 to 20.1 million MTPY in 2016 and to 38.0 million MTPY in 2020. This represents a CAGR of approximately 21% from 2013 to 2020. Europe is expected to be the main force behind forecasted demand. According to Eurostat data, the European Union’s imports of wood pellets have grown rapidly over recent years, from 1.8 million MT in 2009 to 6.0 million MT in 2013, which equates to a CAGR of 36%. The principal non-EU suppliers are the U.S. and Canada, and the U.S. has seen its share of the EU market for imported wood pellets increase from 30% in 2009 to 46% in 2013.

Utility-grade wood pellets are used as a substitute for coal in both converted and co-fired power generation and combined heat and power plants. They enable major power generators to profitably generate electricity in a manner that reduces the overall cost of compliance with mandatory GHG emissions limits and renewable energy targets while also allowing countries to diversify their sources of electricity supply. Unlike wind and solar power generation, wood pellet-fired plants are capable of meeting baseload electricity demand and are dispatchable (that is, power output can be switched on or off or adjusted based on demand). The capital costs required to convert a coal plant to co-fire biomass, or to burn biomass exclusively, are a fraction of the capital costs associated with implementing offshore wind and most other renewable technologies. Furthermore, the relatively quick process of converting coal-fired plants to biomass-fired generation is an attractive benefit for power generators whose generation assets are no longer viable as coal plants due to the expiration of operating permits.

Although worldwide demand for utility-grade wood pellets is expected to be 38.0 million MTPY by 2020, production capacity as of September 30, 2014 is estimated by Hawkins Wright to be only 11.1 million MTPY. Identified wood pellet projects presently under construction or that have committed sources of financing are expected to raise production capacity to only 15.3 million MTPY by the end of 2016. The resulting 22.7 million MTPY gap between identified supply and forecasted 2020 demand will require the development of substantial additional sources of supply, thereby creating considerable growth opportunities for us.

There also continues to be significant growth in the demand for wood pellets to heat homes and commercial buildings and to produce process heat at industrial sites. Global wood pellet consumption for residential- and commercial-scale heating is estimated by Hawkins Wright to have been 13.3 million MT in 2013, and this is projected by Hawkins Wright to grow to approximately 26 million MT in 2020. As the markets develop and commoditize, there will continue to be opportunities for utility-grade wood pellet producers to serve this growing demand.

 

 

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Business Strategies

Our primary business objective is to generate stable and growing cash flows that enable us to maintain and increase our per-unit cash distributions over time. We intend to accomplish this objective by executing the following strategies:

 

    Fully contracting our production with creditworthy customers on terms that provide predictable, growing cash flows. We have long-term, U.S. dollar-denominated, take-or-pay off-take contracts with creditworthy counterparties, including large European power generators. Each of our and our sponsor’s successive contracts has benefited from increased pricing and incremental commercial protections designed to mitigate the impact of changes in inflation, raw material costs, distribution costs and certain other costs. Given this trend and our track record, we believe we will be able to obtain contracts in the future with creditworthy customers that contain longer tenures than our existing contracts and additional provisions that mitigate our cost variability, thereby increasing the stability of our cash flows.

 

    Growing our business through drop-down and third-party acquisitions. We believe that our current scale of operations and relationship with our sponsor provide us with a platform for growth through accretive acquisitions that are complementary to our existing portfolio of assets. Our sponsor will grant us a right of first offer to acquire the Southampton plant as well as any completed development project that it may elect to sell. We refer to acquisitions from our sponsor as “drop-down” acquisitions. We also believe that we are well-positioned to acquire production plants and deep-water marine terminals from third parties as a result of our knowledge of the industry, operating expertise, control of existing deep-water marine terminals and access to capital. Our sponsor acquired our Cottondale plant in             2014. As with the acquisition of our Cottondale plant, we intend to pursue future acquisition opportunities only when they are supported by our own or acquired long-term off-take contracts.

 

    Expanding margins through operational excellence. We can expand our margins by generating incremental revenues through increased production at our existing production plants and from price adjustments for delivery of superior quality products. Our operational excellence is derived from our focus on plant reliability and uptime, raw material conversion efficiency, optimization of raw material mix and a management philosophy of continuous improvement.

 

    Maintaining sound financial practices. We intend to maintain a conservative capital structure that, when combined with our stable, contracted cash flows, should afford us access to capital at a competitive cost. Consistent with our disciplined financial approach, over the long term, we intend to fund our expansion and acquisition projects through a combination of debt and equity issuances. We believe this approach will provide us the flexibility to pursue accretive acquisitions and organic growth projects as they become available.

Competitive Strengths

As a leader in an industry with significant projected demand growth, we believe we have developed the following competitive strengths that will enable us to successfully execute our growth strategy and achieve our primary business objective:

 

    Our low-cost position. We believe we have a cost-advantaged position in our industry for the following reasons:

 

   

Strategically located production plants and deep-water marine terminals. Our production plants are strategically located in the Southeastern U.S., one of the most attractive wood fiber regions in the world due to its abundance of commercial, working forests, growing timber inventories and logistics infrastructure. Consequently, we believe that we are able to access raw materials more cheaply and reliably than competitors whose operations are located in other regions. Furthermore,

 

 

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the proximity of our production plants to the Chesapeake terminal, the Mobile terminal and the Panama City terminal results in low “to-port” transportation costs. Finally, we are able to secure favorable long-term, fixed price shipping contracts due to our terminals’ locations in relation to trade flows between Europe and the Americas.

 

    Large scale of operations. We benefit from economies of scale at each level of our procurement, production, logistics and terminaling operations, which enable us to spread our fixed costs over wood pellet volumes substantially greater than the average producer in our industry.

 

    Deep process know-how. As the largest and one of the most established operators in the industry, we have designed, engineered, built and expanded multiple production plants and a deep-water marine terminal for our products. Our operational experience helps us maintain uptime, throughput, overall performance and cost efficiency at levels we believe few of our competitors can replicate.

 

    Vertical integration. We have made investments to control key areas of our supply chain, in particular our in-house wood fiber procurement activities and our Chesapeake terminal.

 

    In-house wood fiber procurement. We have built an in-house procurement team of 23 employees with an average of over 21 years of experience developing national, regional and local relationships with current and potential wood fiber suppliers. As of 2007, more than 60% of Southern U.S. timber resources were owned by individuals and small companies. Direct access to, and quality relationships with, this fragmented ownership base enable us to reliably procure low-cost wood fiber.

 

    Terminal operations. We own or control critical storage and logistics assets capable of exporting industrial-scale quantities of wood pellets in an economic manner. Because access to this infrastructure is limited, our ownership of the Chesapeake terminal secures our ability to export approximately half of our total production and enables us to generate incremental margin from third parties by managing throughput of their products. Owning the Chesapeake terminal also reduces our storage and loading costs and allows us to directly control inventory and preserve the quality of our products. Finally, because we maintain control over shipping schedules by virtue of our ownership of the Chesapeake terminal and our contractual arrangements at third party ports, we minimize the risk of incurring demurrage costs associated with shiploading delays and the working capital associated with inventory.

 

    Quality and reliability of our products. The uninterruptible nature of baseload power generation requires consistent delivery of high-quality fuel that meets or exceeds customer specifications. Our production processes, in-house control labs and testing procedures, as well as our storage and logistics network, ensure the quality of our products until they reach our customers. In addition, our customers are subject to stringent requirements regarding the sustainability of the fuels they procure. We believe we are a preferred supplier to the major customers in our industry because of the quality and consistency of our products, the reliability of our deliveries and our ability to verify and document, through customer and third-party audits, that our products meet our customers’ regulatory sustainability obligations.

 

   

Our relationship with Enviva Holdings, a committed sponsor with well-capitalized owners. Our sponsor is an experienced acquirer and developer of industrial-scale wood pellet production plants and deep-water marine terminals and has acquired or developed all of the assets that constitute our business. Following this offering, our sponsor will own a 510,000 MTPY production plant located in Southampton, VA, and our sponsor is currently developing the Wilmington Projects, consisting of three 500,000 MTPY wood pellet production plants and a deep-water marine terminal in the Wilmington, NC region. Our sponsor intends to use the net proceeds from this offering to finance the construction of a portion of the Wilmington Projects consisting of the first production plant and the terminal. Our sponsor will grant us a right of first offer on the Southampton plant, the Wilmington

 

 

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Projects and similar assets it may develop in the future. As the owner of approximately     % of our common units, all of our subordinated units, all of the incentive distribution rights and our general partner, our sponsor is incentivized to facilitate our access to accretive acquisition and organic growth opportunities.

 

    Experienced management. As recognized leaders at the forefront of our industry, the members of our management team have extensive experience in the commercial development and operation of wood pellet production plants and logistics assets throughout the U.S., Latin America, the Caribbean and Europe. They have developed strong relationships with our Northern European and Asian customer base. Members of our management team average approximately 18 years of relevant experience from the forestry, traditional wood products, midstream energy, engineering and construction and general industrial manufacturing sectors, in addition to experience at Fortune 500 companies and publicly traded master limited partnerships. Our management team’s ability to develop and maintain customer relationships, operate our business in a cost-effective manner and efficiently integrate acquisitions is crucial to the continued growth of our business.

Risk Factors

An investment in our common units involves risks. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before deciding whether to invest in our common units.

Our Management

We are managed and operated by the board of directors and executive officers of our general partner, Enviva Partners GP, LLC, a wholly owned subsidiary of our sponsor. As a result of owning our general partner, our sponsor will have the right to appoint all members of the board of directors of our general partner, including at least three directors meeting the independence standards established by the NYSE. We expect to appoint three independent directors prior to the date our common units are listed for trading on the NYSE. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read “Management.”

About Our Sponsor

One of our principal strengths is our relationship with Enviva Holdings, our sponsor. Our sponsor has acquired, developed and operated wood pellet production plants and deep-water marine terminals, including all of the assets that constitute our business.

At the closing of this offering, our sponsor will own approximately     % of our common units, all of our subordinated units, all of the incentive distribution rights and our general partner. As a result, our sponsor is incentivized to facilitate our access to accretive acquisition and organic growth opportunities, including pursuant to the right of first offer it will grant us in connection with the closing of this offering.

Our Sponsor’s Owners

The Riverstone Funds became the majority owners of Enviva Holdings in March 2010. As of September 30, 2014, the Riverstone Funds have invested $341.6 million of equity in Enviva Holdings. Our sponsor has grown the business being contributed to us into the world’s largest supplier by production capacity of utility-grade wood pellets. The Riverstone Funds own 94.6% of the limited partner interests in Enviva Holdings and own Enviva Holdings’ general partner, with the balance of the limited partner interests owned by legacy owners of our sponsor and certain members of management. Riverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with approximately $27.0 billion of equity capital raised. Riverstone conducts buyout and growth capital investments in the exploration and

 

 

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production, midstream, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London, Houston and Mexico City, the firm has committed approximately $27.0 billion to 112 investments in North America, Latin America, Europe, Africa and Asia as of September 30, 2014.

Summary of Conflicts of Interest and Fiduciary Duties

Although our relationship with our sponsor may provide significant benefits to us, it may also become a source of potential conflicts. For example, Enviva Holdings is not restricted from competing with us. In addition, the executive officers and certain of the directors of our general partner also serve as officers or directors of Enviva Holdings, and these officers and directors face conflicts of interest, including conflicts of interest regarding the allocation of their time between us and Enviva Holdings.

Our general partner has a contractual duty to manage us in a manner that it believes is not adverse to our interest. However, the officers and directors of our general partner have fiduciary duties to manage our general partner in a manner beneficial to our sponsor, the owner of our general partner. As a result, conflicts of interest may arise in the future between us or our unitholders, on the one hand, and our sponsor and our general partner, on the other hand.

Our partnership agreement limits the liability of and replaces the fiduciary duties owed by our general partner to our unitholders. Our partnership agreement also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of duties by our general partner or its directors or officers. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each unitholder is treated as having consented to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law.

For a more detailed description of the conflicts of interest and duties of our general partner and its directors and officers, please read “Conflicts of Interest and Fiduciary Duties.” For a description of other relationships with our affiliates, please read “Certain Relationships and Related Transactions.”

Principal Executive Offices

Our principal executive offices are located at 7200 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814, and our telephone number is (301) 657-5560. Our website address will be http://www.envivapartners.com. We intend to make our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”) available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

    provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

 

    comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

    comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise;

 

 

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    provide certain disclosures regarding executive compensation required of larger public companies; or

 

    obtain unitholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

    when we have $1.0 billion or more in annual revenues;

 

    on the last day of the year in which at least $700.0 million in market value of our common units is held by non-affiliates as of the preceding June 30th;

 

    when we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

    the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

The Transactions

We are a Delaware limited partnership formed in November 2013 by Enviva Holdings, our sponsor, to own and operate certain of the businesses that have historically been conducted by our sponsor.

In connection with this offering, the following transactions (the “Transactions”) will occur:

 

    Enviva, LP will distribute its 100% equity interest in Enviva Pellets Southampton, LLC, which owns the 510,000 MTPY Southampton plant, to our sponsor;

 

    our sponsor will contribute its interests in Enviva Pellets Cottondale, LLC to Enviva, LP;

 

    our sponsor will contribute its interests in each of Enviva, LP and Enviva GP, LLC, the general partner of Enviva, LP, to us;

 

    we will enter into a credit agreement for a new aggregate $215.0 million senior secured credit facilities, comprised of a $175.0 million term loan facility and a $40.0 million revolving credit facility and pay $         million of fees and expenses as a result of entering into the new senior secured credit facility;

 

    we will use $95.0 million from borrowings under the new term loan facility to repay our existing credit facility and $77.1 million to make a distribution to our sponsor, which will use the cash to repay indebtedness used to fund the acquisition of Enviva Pellets Cottondale, LLC;

 

    we will issue to our sponsor              common units and              subordinated units;

 

    we will issue the incentive distribution rights to our sponsor;

 

    we will issue              common units to the public;

 

    we will receive gross proceeds of $         million from the issuance and sale of              common units at an assumed initial offering price of $         per unit (the mid-point of the price range set forth on the cover page of this prospectus);

 

    we will use $         million of the proceeds from this offering to pay underwriting discounts and estimated offering expenses of $         million; and

 

    we will use $         million of the proceeds from this offering to pay a distribution to our sponsor.

 

 

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We have granted the underwriters a 30-day option to purchase up to              additional common units. Any net proceeds received from the exercise of this option will be distributed to Enviva Holdings. If the underwriters do not exercise this option in full or at all, the common units that would have been sold to the underwriters had they exercised the option in full will be issued to Enviva Holdings for no additional consideration at the expiration of the option period. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding.

Organizational Structure

The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.

 

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Public Common Units

          %(1) 

Interests of Enviva Holdings:

     

Common Units

          %(1) 

Subordinated Units

         

Non-Economic General Partner Interest

        0.0 %(2) 

Incentive Distribution Rights

        —   (3) 
  

 

  

 

 

 
        100.0
  

 

  

 

 

 

 

(1) Assumes the underwriters do not exercise their option to purchase additional common units and such additional common units are issued to Enviva Holdings.
(2) Our general partner owns a non-economic general partner interest in us. Please read “How We Make Distributions To Our Partners—General Partner Interest.”
(3) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.” Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests. Incentive distribution rights will be issued to Enviva Partners GP, LLC, our general partner, which is wholly owned by Enviva Holdings.

 

 

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The Offering

 

Common units offered to the public

            common units.

 

             common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

            common units and             subordinated units for a total of              limited partner units. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the underwriters and the remainder, if any, will be issued to our sponsor. Any such units issued to our sponsor will be issued for no additional consideration. If the underwriters do not exercise their option to purchase additional common units, we will issue common units to our sponsor upon the option’s expiration for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding.

 

Use of proceeds

We intend to use the estimated net proceeds of approximately $         million from this offering (based on an assumed initial offering price of $         per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and offering expenses, to pay a distribution to our sponsor related to its contribution of assets to us in connection with this offering. We will not be required to pay additional cash consideration for such contributed assets or reimburse our sponsor for additional capital expenditures. If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds will be approximately $         million (based on an assumed initial offering price of $         per common unit, the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to make a special distribution to our sponsor. Please read “Use of Proceeds.” Our sponsor intends to use the net proceeds from this offering to finance the construction of the first production plant and the deep-water marine terminal of the Wilmington Projects.

 

Cash distributions

Within 60 days after the end of each quarter, beginning with the quarter ending             , 2014, we expect to make a minimum quarterly distribution of $         per common unit and subordinated unit ($         per common unit and subordinated unit on an annualized basis) to unitholders of record on the applicable record date. For the first quarter that we are publicly traded, we will pay a prorated distribution covering the period after the completion of this offering through                     , 2014, based on the actual length of that period.

 

 

The board of directors of our general partner will adopt a policy pursuant to which distributions for each quarter will be paid to the extent we have sufficient cash after establishment of cash reserves

 

 

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and payment of fees and expenses, including payments to our general partner and its affiliates. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail in “Cash Distribution Policy and Restrictions on Distributions.”

 

  Our partnership agreement generally provides that we will distribute cash each quarter during the subordination period in the following manner:

 

    first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

    second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $         ; and

 

    third, to the holders of common units and subordinated units pro rata until each has received a distribution of $            .

 

  If cash distributions to our unitholders exceed $         per common unit and subordinated unit in any quarter, our unitholders and our general partner, as the holder of our incentive distribution rights (“IDRs”), will receive distributions according to the following percentage allocations:

 

Total Quarterly Distribution

            Target Amount

   Marginal Percentage Interest
in Distributions
 
   Unitholders     General Partner
(as holder of IDRs)
 

above $         up to $        

     85.0     15.0

above $         up to $        

     75.0     25.0

above $        

     50.0     50.0

 

  We refer to the additional increasing distributions to our general partner as “incentive distributions.” Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions,” that we will have sufficient cash available for distribution to pay the minimum quarterly distribution of $         on all of our common units and subordinated units for the twelve months ending December 31, 2015. However, we do not have a legal or contractual obligation to pay distributions quarterly or on any other basis at the minimum quarterly distribution rate or at any other rate and there is no guarantee that we will pay distributions to our unitholders in any quarter. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Our sponsor will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that, for any quarter during the subordination period, holders

 

 

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of the subordinated units will not be entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid an aggregate amount of at least $         (the minimum quarterly distribution on an annualized basis) multiplied by the total number of outstanding common and subordinated units for each of three consecutive, non-overlapping four-quarter periods ending on or after                     , 2017 and there are no outstanding arrearages on our common units.

 

  Notwithstanding the foregoing, the subordination period will end on the first business day after we have paid an aggregate amount of at least $         (150.0% of the minimum quarterly distribution on an annualized basis) multiplied by the total number of outstanding common and subordinated units and we have earned that amount plus the related distribution on the incentive distribution rights for any four-quarter period ending on or after             , 2015 and there are no outstanding arrearages on our common units.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units will thereafter no longer be entitled to arrearages.

 

General partner’s right to reset the target distribution levels

Our general partner, as the initial holder of our incentive distribution rights, will have the right, at any time when there are no subordinated units outstanding and we have made distributions in excess of the then-applicable third target distribution for the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our general partner transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election, the minimum quarterly distribution will be adjusted to equal the distribution for the quarter immediately preceding the reset, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution as the initial target distribution levels were above the minimum quarterly distribution.

 

 

If the target distribution levels are reset, the holders of our incentive distribution rights will be entitled to receive common units. The number of common units to be issued will equal the number of common units that would have entitled the holders of our incentive distribution rights to an aggregate quarterly cash distribution for the

 

 

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quarter prior to the reset election equal to the distribution on the incentive distribution rights for the quarter prior to the reset election. Please read “How We Make Distributions To Our Partners—Incentive Distribution Right Holders’ Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 23% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, our sponsor will own an aggregate of     % of our outstanding units (or     % of our outstanding units, if the underwriters exercise their option to purchase additional common units in full). This will give our sponsor the ability to prevent the removal of our general partner. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will provide our sponsor the ability to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “The Partnership Agreement—Limited Call Right.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending             , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than     % of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable

 

 

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income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We have been invited to apply to list our common units on the New York Stock Exchange (the “NYSE”) under the symbol “EVA.”

 

 

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Summary Historical Consolidated and Unaudited Pro Forma Financial and Operating Data

Enviva Partners, LP was formed in November 2013 and does not have historical consolidated financial statements. We have not presented historical consolidated financial information for Enviva Partners, LP because we have not had any corporate activity since our formation and we believe that a presentation of the results of Enviva Partners, LP would not be meaningful. Therefore, in this prospectus we present the historical consolidated financial statements of Enviva, LP and its operating subsidiaries, which entities (excluding Enviva Pellets Southampton, LLC) will be transferred by Enviva MLP Holdco, LLC to Enviva Partners, LP upon the closing of this offering. We refer to these entities as “Enviva Partners, LP Predecessor.” The following table presents summary historical consolidated financial and operating data of Enviva Partners, LP Predecessor as of the dates and for the periods indicated.

The summary historical consolidated financial data presented as of and for the years ended December 31, 2013 and 2012 is derived from the audited historical consolidated financial statements of Enviva Partners, LP Predecessor that are included elsewhere in this prospectus. The summary historical consolidated financial data presented as of and for the six months ended June 30, 2014 and 2013 are derived from the unaudited condensed historical financial statements of Enviva Partners, LP Predecessor included elsewhere in this prospectus.

The following table presents, in each case for the periods and as of the dates indicated, summary historical combined financial and operating data of our predecessor and summary pro forma combined financial and operating data of Enviva Partners, LP.

The summary pro forma combined financial and operating data presents unaudited pro forma balance sheet data as of June 30, 2014, and statement of operations and other financial and operating data for the year ended December 31, 2013 and the six months ended June 30, 2014 of Enviva Partners, LP, based upon our predecessor’s combined historical financial statements after giving pro forma effect to the Transactions described in “—The Transactions.” The pro forma combined financial data assumes that the Transactions had taken place on June 30, 2014, in the case of the pro forma balance sheet, and on January 1, 2013, in the case of the pro forma statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014. The pro forma balance sheet, statement of operations and other financial and operating data presented are not necessarily indicative of what our actual results of operations would have been as of the date and for the periods indicated, nor do they purport to represent our future results of operations.

 

 

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For a detailed discussion of the summary historical consolidated financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with “Use of Proceeds,” the audited and unaudited historical consolidated financial statements of Enviva Partners, LP Predecessor included elsewhere in this prospectus and the unaudited pro forma financial statements of Enviva Partners, LP included elsewhere in this prospectus. Among other things, the historical consolidated financial statements include more detailed information regarding the basis of presentation for the information in the following table.

 

     Enviva Partners, LP Predecessor Historical     Enviva Partners, LP Pro
Forma
 
     Year Ended
December 31,
    Six MonthsEnded June
30,
    Year Ended
December 31,
2013
    Six Months
Ended
June 30,

2014
 
     2013     2012     2014     2013      
                 (unaudited)     (unaudited)  
     (in thousands, except per metric ton and operating data)  

Statement of Operations Data:

            

Product sales

   $ 176,051      $ 100,537      $ 133,146      $ 74,207      $ 300,664      $ 205,582   

Other revenue

     3,836        2,787        1,903        1,188        4,106        2,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     179,887        103,324        135,049        75,395        304,770        207,742   

Costs of goods sold, excluding depreciation and amortization

     152,720        91,761        121,610        67,022        249,123        176,531   

Depreciation and amortization (1)

     11,827        7,454        9,541        4,445        21,773        11,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     164,547        99,215        131,151        71,467        270,896        188,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     15,340        4,109        3,898        3,928        33,874        19,496   

General and administrative expenses

     16,373        21,568        4,562        9,257        16,537        6,151   

Related party monitoring fee

     —          674        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (1,033     (18,133     (664     (5,329     17,337        13,345   

Other income (expense):

            

Interest expense

     (5,460     (1,237     (4,495     (2,098     (7,605     (4,988

Early retirement of debt obligation

     —          (837     (73     —          (9,246     —     

Other income

     996        447        4        987        1,278        275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (4,464     (1,627     (4,564     (1,111     (15,573     (4,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (5,497     (19,760     (5,228     (6,440     1,764        8,632   

Loss from discontinued operations

     —          (30,112     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (5,497     (49,872     (5,228     (6,440     1,764        8,632   

Less net loss attributable to noncontrolling partners’ interests

     58        15,703        42        29        58        42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Enviva Partners, LP

   $ (5,439   $ (34,169   $ (5,186   $ (6,411   $ 1,822      $ 8,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Enviva Partners, LP Predecessor Historical     Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
    Six Months Ended June
30,
    Year Ended
December 31,
2013
     Six Months
Ended June
30,

2014
 
     2013     2012     2014     2013       
                 (unaudited)     (unaudited)  
     (in thousands, except per metric ton and operating data)  

Statement of Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

   $ (7,577   $ (19,448   $ 19,672      $ (4,726     

Investing activities

     (115,799     (98,134     (12,907     (96,094     

Financing activities

     115,235        118,054        (5,863     103,682        

Other Financial Data:

             

Adjusted EBITDA (2)

   $ 12,101      $ (9,402   $ 8,969      $ 444      $ 41,136       $ 25,401   

Adjusted gross margin per metric ton (2)

   $ 29.18      $ 20.72      $ 19.28      $ 21.25        

Expansion capital expenditures (3)

     124,732        90,471        12,977        63,760        

Operating Data:

             

Total metric tons sold

     931        558        697        394        

Balance Sheet Data (at period end):

             

Cash and cash equivalents

   $ 3,558      $ 11,699      $ 4,460      $ 14,562         $ 10,422   

Total assets

     400,003        273,636        388,826        390,136           485,889   

Long-term debt and capital lease obligations (including current portion)

     100,524        40,159        101,187        96,497           177,616   

Total liabilities

     128,592        57,678        121,773        130,931           200,003   

Partners’ capital

     271,411        215,958        267,053        259,205           285,886   

 

(1) Excludes depreciation of office furniture and equipment. Such amount is included in general and administrative expenses.
(2) For more information, please read “—Non-GAAP Financial Measures” below.
(3) Expansion capital expenditures are cash expenditures made to increase our long-term operating capacity or net income whether through construction or acquisitions. Please read “How We Make Distributions to Our Partners—Capital Expenditures.”

 

 

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Non-GAAP Financial Measures

Adjusted EBITDA

We define adjusted EBITDA as income or loss from continuing operations, excluding depreciation and amortization, interest expense, taxes, early retirement of debt obligation, non-cash equity compensation and asset impairments and disposals. Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles (“GAAP”). Management uses adjusted EBITDA as an important indicator of performance.

We believe that the presentation of adjusted EBITDA provides useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to adjusted EBITDA is loss from continuing operations. Our non-GAAP financial measure of adjusted EBITDA should not be considered as an alternative to GAAP loss from continuing operations. Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect loss from continuing operations. You should not consider adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because adjusted EBITDA may be defined differently by other companies in our industry, our definition of adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

    Enviva Partners, LP Predecessor Historical     Enviva Partners, LP Pro Forma  
    Year Ended
December 31,
    Six Months Ended
June 30,
    Year Ended
December 31,
    Six Months Ended
June 30,
 
    2013     2012     2014     2013     2013     2014  
                (unaudited)     (unaudited)          
   

(in thousands)

 

Reconciliation of adjusted EBITDA to (loss) income from continuing operations:

           

(Loss) income from continuing operations

  $ (5,497   $ (19,760   $ (5,228   $ (6,440   $ 1,764      $ 8,632   

Depreciation and amortization

    11,887        7,731        9,558        4,479        21,858        11,759   

Interest expense

    5,460        1,237        4,495        2,098        7,605        4,988   

Early retirement of debt obligation

    —          837        73        —          9,246        —     

Non-cash equity compensation

    5        509        1        2        5        1   

Income tax expense

    23        12        8        23        23        —     

Asset impairments and disposals

    223        32        62        282        635        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 12,101      $ (9,402   $ 8,969      $ 444      $ 41,136      $ 25,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 depreciation and amortization included in cost of goods sold. We believe adjusted gross margin per metric ton is a meaningful measure because it compares our off-take pricing to our operating costs for a view of profitability and performance on a per metric ton basis. Adjusted gross margin per

 

 

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metric ton will primarily be affected by our ability to meet 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.

We believe that the presentation of adjusted gross margin per metric ton will provide useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to adjusted gross margin per metric ton is gross margin. Our non-GAAP financial measure of adjusted gross margin per metric ton should not be considered as an alternative to GAAP gross margin. Adjusted gross margin per metric ton has important limitations as an analytical tool because it excludes some but not all items that affect gross margin. You should not consider adjusted gross margin per metric ton in isolation or as a substitute for analysis of our results as reported under GAAP. Because adjusted gross margin per metric ton may be defined differently by other companies in our industry, our definition of adjusted gross margin per metric ton may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of adjusted gross margin per metric ton to the most directly comparable GAAP financial measure on a historical basis and a pro forma basis, as applicable, for each of the periods indicated.

 

     Enviva Partners, LP Predecessor Historical      Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
     Six Months Ended
June 30,
     Year Ended
December 31,
     Six Months Ended
June 30,
 
         2013              2012              2014              2013          2013      2014  
                   (unaudited)      (unaudited)          
    

(in thousands, except per metric ton)

 

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

                 

Metric tons sold

     931         558         697         394         

Gross margin

   $ 15,340       $ 4,109       $ 3,898       $ 3,928       $ 33,874       $ 19,496   

Depreciation and amortization (1)

     11,827         7,454         9,541         4,445         21,773         11,715   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted gross margin

   $ 27,167       $ 11,563       $ 13,439       $ 8,373       $ 55,647       $ 31,211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted gross margin per metric ton

   $ 29.18       $ 20.72       $ 19.28       $ 21.25         

 

  (1) Excludes depreciation of office furniture and equipment. Such amount is included in general and administrative expenses.

 

 

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RISK FACTORS

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition, results of operations and cash available for distribution could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

Risks Inherent in Our Business

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $         per unit, or $         per unit per year, which will require us to have cash available for distribution of approximately $         million per quarter, or $         million per year, based on the number of common and subordinated units that will be outstanding after the completion of this offering. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on the following factors, some of which are beyond our control:

 

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

 

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

 

    non-performance by our customers;

 

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

 

    changes in the price and availability of natural gas, diesel, oil or coal;

 

    changes in prevailing economic conditions;

 

    inclement or hazardous weather conditions, including flooding;

 

    environmental hazards;

 

    fires, explosions or other accidents;

 

    changes in domestic and foreign laws and regulations (or the interpretation thereof) related to the forest product industry or power generators;

 

    domestic and foreign governmental regulations, particularly those relating to the environment, support for renewable energy, climate change, health and safety;

 

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

 

    facility shutdowns in response to environmental regulatory actions;

 

    inability to obtain necessary production equipment or replacement parts;

 

    technical difficulties, equipment failures or degradation of the throughput of our facilities;

 

    labor disputes;

 

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    late delivery of supplies;

 

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

 

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

 

    changes in the price and availability of transportation.

In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:

 

    the level of capital expenditures we make;

 

    costs associated with construction projects at our existing facilities;

 

    construction costs;

 

    fluctuations in our working capital needs;

 

    our ability to borrow funds and access capital markets;

 

    our treatment as a flow-through entity for U.S. federal income tax purposes;

 

    our debt service requirements and other liabilities;

 

    restrictions contained in our existing or future debt agreements; and

 

    the amount of cash reserves established by our general partner.

For a description of additional restrictions and factors that may affect our ability to pay cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for each quarter in the year ended December 31, 2013 and the twelve months ended June 30, 2014.

The amount of cash we need to pay the minimum quarterly distribution on all of our common and subordinated units that will be outstanding immediately after this offering is approximately $             million. The amount of pro forma cash available for distribution generated during the quarters ended March 31, 2013, June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014 was $           million, $           million, $           million, $           million, $           million and $           million, respectively, which would have allowed us to pay only     % and     % of the minimum quarterly distribution, respectively, on our common units and no distributions to our subordinated units during the quarters ended March 31, 2013 and June 30, 2014 and no distributions on any of our units for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014. For a calculation of our ability to make distributions to unitholders on a pro forma basis for each quarter in the year ended December 31, 2013 and the twelve months ended June 30, 2014, please read “Cash Distribution Policy and Restrictions on Distributions.”

The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may be unable to pay cash distributions during periods when we record net income.

If we are unable to integrate the acquisition of Green Circle (Enviva Cottondale) successfully, our business may be harmed.

The acquisition of Green Circle (now known as Enviva Cottondale) involves the integration of two companies that had operated independently. The success of the acquisition will depend, in large part, on our ability to realize the anticipated benefits, including synergies, cost savings, innovation and operational

 

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efficiencies, from combining these businesses. To realize these anticipated benefits, Green Circle’s business must be successfully integrated with ours. This integration may be complex and time-consuming. We may not realize the full benefits of our acquisition of Green Circle as a result of the failure to integrate successfully and to manage successfully the challenges presented by the integration process.

Potential difficulties that may be encountered in the integration process include the following:

 

    complexities and additional expenses associated with managing the larger combined business;

 

    complexities associated with retaining Green Circle’s personnel and integrating its administrative functions,

 

    the inability to retain Green Circle’s customer, supplier and other key business relationships;

 

    the inability to establish uniform standards, disclosure controls, policies and procedures in a timely manner;

 

    incurrence of additional unforeseen expenses in connection with the integration process; and

 

    the diversion of management’s attention from other business concerns to facilitate the integration.

Any of these difficulties in successfully integrating Green Circle’s business into ours, or any delays in the integration process, could adversely affect our ability to achieve the anticipated benefits of the acquisition and could adversely affect our business, results of operations, financial condition and ability to make distributions to our unitholders. Even if we are able to integrate the business operations of Green Circle successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect, or that these benefits will be achieved within the anticipated time frame.

Because we have a limited operating history, you may not be able to evaluate our current business and future earnings prospects accurately.

We did not commence commercial operations until the third quarter of 2010, when we acquired the Amory plant. As a result, we have a limited operating history upon which you can base an evaluation of our current business and our future earnings prospects.

In addition, this prospectus includes audited consolidated financial statements only as of and for the years ended December 31, 2013 and 2012 and unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2014 and 2013. You have limited information upon which to make your decision to invest in our common units.

We have incurred losses from operations during certain periods since our inception and may do so in the future.

We incurred net losses from continuing operations of $5.5 million and $19.8 million for each of the years ended December 31, 2013 and 2012, respectively, and $5.2 million and $6.4 million for the six months ended June 30, 2014 and 2013, respectively. Additionally, we may incur net losses in the future. The uncertainty and risks described in this prospectus may impede our ability to become profitable or have positive cash flows from operating activities in the future.

 

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The assumptions underlying our forecast of cash available for distribution included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from those estimates.

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and cash available for distribution for the twelve months ending December 31, 2015. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct.

Our forecast of cash available for distribution has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to significant business, economic, operational, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from that which is forecasted. If we do not achieve our forecasted results, we may not be able to pay the minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Cash Distribution Policy and Restrictions on Distributions.”

Substantially all of our revenues are generated under contracts with three customers, and the loss of any of them could adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions. We may not be able to renew or obtain new and favorable contracts when our existing contracts expire, which could adversely affect our revenues and profitability.

Our contracts with E.ON, Drax and GDF will represent substantially all of our sales for 2014. Because we have a small number of customers, our off-take contracts subject us to counterparty risk concentration. The ability of each of our customers to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, the overall financial condition of the counterparty, the condition of the Northern European power generation industry, continuing economic support for wood pellet-generated power and general economic conditions. In addition, in depressed market conditions, our customers may no longer need the amount of our products they have contracted for or may be able to obtain comparable products at a lower price. If our customers experience a significant downturn in their business or financial condition, they may attempt to renegotiate or declare force majeure under our contracts. Should a counterparty fail to honor its obligations under a contract with us, we could sustain losses, which could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution. We may also decide to renegotiate our existing contracts on less favorable terms and at reduced volumes in order to preserve our relationships with our customers.

Upon the expiration of our off-take contracts, our customers may decide not to recontract on terms as favorable to us as our current contracts, or at all. For example, our current customers may acquire wood pellets from other providers that offer more competitive pricing or logistics or develop their own sources of wood pellets. Some of our customers could also exit their current business or be acquired by other companies that purchase wood pellets from other providers. The demand for wood pellets or their prevailing prices at the time our current off-take contracts expire may also render entry into new long-term off-take contracts difficult or impossible.

Any reduction in the amount of wood pellets purchased by our customers, renegotiation on less favorable terms, or inability to enter into new contracts on economically acceptable terms upon the expiration of our current contracts could have a material adverse effect on our results of operations, business and financial position, as well as our ability to pay distributions to our unitholders.

 

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We derive substantially all of our revenues from customers in Northern Europe. If we fail to diversify our customer base in the future, our results of operations, business and financial position and ability to make cash distributions could be materially adversely affected.

A substantial portion of our revenues has historically been derived from customers in Northern Europe, and our revenues have been heavily dependent on developments in the Northern European markets. As a result, our revenues are subject to decrease in demand and overall negative market conditions in Northern Europe. Further, if economic and financial market conditions in Europe remain uncertain, persist or deteriorate further as a result of continued weakness in European economies, our customers may respond by suspending, delaying or reducing their expenditures. Our failure to successfully penetrate markets outside of Northern Europe in the future could have a material adverse effect on our results of operations, business and financial position, and our ability to pay distributions to our unitholders.

Changes in government policies, incentives and taxes implemented to support increased generation of low-carbon and renewable energy may affect customer demand for our products.

Consumers of utility-grade wood pellets currently use our products either as part of a binding obligation to generate a certain percentage of low-carbon energy or because they receive direct or indirect financial support or incentives to do so. Financial support is often necessary to cover the generally higher costs of wood pellets compared to conventional fossil fuels like coal. In most countries, once the government implements a tax (e.g., the UK’s carbon price floor tax) or a preferable tariff or a specific renewable energy policy either supporting a renewable energy generator or the energy generating sector as a whole, such tax, tariff or policy is guaranteed for a specified period of time, sometimes for the investment lifetime of any electricity generator’s project. However, the government may modify its tax, tariff, or incentive regimes, and the future availability of such taxes, tariffs or policies, either in current jurisdictions beyond the prescribed timeframes or in new jurisdictions, is uncertain. Demand for wood pellets could be substantially lower than expected if government support is reduced or delayed or in the future is insufficient to enable successful deployment of biomass power to the levels currently projected. In addition, regulatory changes such as new requirements to install additional pollution control technology or curtail operations to meet new GHG emission limits, may also affect demand for our products. For example, in the U.S., current regulations exempt biomass-fired generating units from GHG emission regulations of the U.S. Environmental Protection Agency (“U.S. EPA”). In July 2013, the D.C. Circuit Court, in Center for Biological Diversity v. EPA vacated U.S. EPA’s July 1, 2011 decision to grant a three-year deferral of the applicability of Prevention of Significant Deterioration (“PSD”) and Title V permitting requirements for carbon dioxide emissions to certain biomass-fired generators. However, the D.C. Circuit Court also stayed its ruling and delayed any rehearing until after the Supreme Court issued its decision in Utility Air Regulatory Group (UARG) v. EPA, effectively leaving U.S. EPA’s deferral in place. Although the U.S. Supreme Court issued its decision in UARG v. EPA in June 2014, generally upholding U.S. EPA’s authority to regulate GHG emissions from certain stationary sources, there has been no resolution of the validity of U.S. EPA’s exemption for biomass-fired facilities. On September 19, 2014 the D.C. Circuit issued an order extending the deadline to submit petitions for rehearing in Center for Biological Diversity v. EPA until the D.C. Circuit issues its mandate in a related case, Coalition for Responsible Regulation v. EPA. Until the petition for rehearing in Center for Biological Diversity v. EPA is decided, the exemption for biomass-fired power plants will remain in place.

In addition to U.S. EPA’s PSD and Title V requirements, U.S. EPA has also proposed regulations limiting carbon dioxide emissions from new and existing power plants. In September 2013, EPA issued proposed limits for carbon dioxide emissions from new coal and natural gas-fired electric utility generating units; however, units primarily firing biomass would not be subject to the standard. In June 2014, U.S. EPA proposed its Clean Power Plan, limiting carbon dioxide emissions from existing power plants, with targeted emission reductions of 30% from 2005 levels by 2030, and under which each state would be required to implement plan to achieve its assigned state-specific target. At present, the applicability of these proposed carbon dioxide regulations to biomass-fired power plants cannot be predicted, particularly in light of the possibility of further hearings in

 

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Center for Biological Diversity v. EPA after the decision in UARG v. EPA. Accordingly, it is possible that in the future, U.S. EPA or individual states may seek (or be required) to regulate carbon dioxide or other GHG emissions from biomass-fired power plants, including requiring such plants to retroactively obtain permits or install pollution control technology. Such developments could negatively impact the demand for wood pellets and limit our growth in the U.S. market.

The international nature of our business subjects us to a number of risks, including unfavorable political, regulatory and tax conditions in foreign countries.

Substantially all of our current product sales are to customers that operate outside of the United States. As a result, we face certain risks inherent to maintaining international operations that include, but are not limited to, the following:

 

    restrictions on foreign trade and investment, including currency exchange controls imposed by or in other countries;

 

    trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make our products less competitive in some countries; and

 

    foreign exchange movements, which may make it more difficult for our customers to make payments denominated in U.S. dollars.

Our business in foreign countries requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed under differing legal, regulatory, economic, social and political conditions. There can be no assurance, however, that we will be able to develop, implement and maintain policies and strategies that will be effective in each location where our customers operate. Any of the foregoing factors could have a material adverse effect on our results of operations, business and financial position and our ability to pay distributions to our unitholders.

Federal, state and local legislative and regulatory initiatives relating to forestry products and the potential for related litigation could result in increased costs, additional operating restrictions or delays for our suppliers and customers, respectively, which could cause a decline in the demand for our products and negatively impact our business, financial condition and results of operations.

Currently, our raw materials are byproducts of traditional timber harvesting, principally the tops and limbs of trees as well as other low-value wood materials that are generated in a harvest, and industrial residuals (chips, sawdust and other wood industry byproducts). Commercial forestry is regulated by complex regulatory frameworks at each of the federal, state, and local levels. Among other federal laws, the Clean Water Act and Endangered Species Act have been applied to commercial forestry operations through agency regulations and court decisions, as well as through the delegation to states to implement and monitor compliance with such laws. State forestry laws, as well as land use regulations and zoning ordinances at the local level, are also used to manage forests in the Southeastern U.S., as well as other regions from which we may need to source raw materials in the future. Any new or modified laws or regulations at any of these levels could have the effect of reducing forestry operations in areas where we procure our raw materials, and consequently may prevent us from purchasing raw materials in an economic manner, or at all. In addition, future regulation of, or litigation concerning, the use of timberlands, the protection of endangered species, the promotion of forest biodiversity, and the response to and prevention of wildfires, as well as litigation, campaigns or other measures advanced by environmental activist groups, could also reduce the availability of the raw materials required for our operations.

 

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The actions of certain non-governmental organizations could result in increased or adverse regulation of our business.

Certain non-governmental organizations with an interest in environmental issues have expressed their opposition to the use of biomass for power generation, both publically and directly to domestic and foreign power generators and other industrial users of biomass. These organizations are also actively lobbying domestically and abroad to significantly increase the regulation of, and reduce or eliminate the incentives and support for, the production and use of biomass for power generation. These organizations may also seek to increase regulation through litigation. For example, in Center for Biological Diversity, et al. v. U.S. EPA, environmental groups contested the U.S. EPA’s decision to defer regulation of carbon dioxide emissions from biomass-fired power plants. In July 2013, the D.C. Circuit Court of Appeals held that the U.S. EPA did not have authority under the Clean Air Act to exempt from regulation carbon dioxide emissions from biomass-fired power plants. It is possible that the efforts of these organizations, whether through lobbying, litigation or other means, will result in the adoption of regulation that could adversely affect our current operations or those of our customers or impede expansions. The occurrence of any of these events could have a material adverse effect on our results of operations, business and financial condition, and our ability to make cash distributions to our unitholders.

The viability of our customers’ business may also affect demand for our products and the results of our business and operations.

The viability of our customers’ businesses is dependent on their ability to compete in their respective electricity and heat markets. Our customers’ competitiveness is a function of, among other things, the market price of electricity, the market price of competing fuels (e.g. coal and natural gas), the relative cost of carbon and the costs of generating heat or electricity using other renewable energy technologies. Changes in the values of the inputs and outputs of our customers’ businesses, or of the businesses of their competitors, could have a material adverse effect on our customers and, as a result, could have a material adverse effect on our results of operations, business and financial position, and our ability to pay distributions to our unitholders.

The growth of our business depends in part upon locating and acquiring interests in additional production plants and deep-water marine terminals at favorable prices.

Our business strategy includes growing our business through drop-down and third-party acquisitions that result in an increase in our cash available for distribution per unit. Various factors could affect the availability of attractive projects to grow our business, including:

 

    our sponsor’s failure to complete its development projects in a timely manner or at all, which could result from, among other things, permitting challenges, failure to procure the requisite financing or equipment or an inability to obtain an off-take contract on acceptable terms;

 

    our failure or inability to exercise our right of first offer with respect to any asset that our sponsor offers to us; and

 

    fewer third-party acquisition opportunities than we expect, which could result from, among other things, available projects having less desirable economic returns, anti-trust concerns or higher risk profiles than we believe suitable for our business plan and investment strategy.

Any of these factors could prevent us from executing our growth strategy or otherwise could have a material adverse effect on our results of operations, business and financial position, and our ability to pay distributions to our unitholders.

 

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Any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

We may consummate acquisitions that we believe will be accretive, but that result in a decrease in our cash available for distribution per unit. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:

 

    mistaken assumptions about revenues and costs, including synergies;

 

    the inability to successfully integrate the businesses we acquire;

 

    the inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets;

 

    the assumption of unknown liabilities;

 

    limitations on rights to indemnity from the seller;

 

    mistaken assumptions about the overall costs of equity or debt;

 

    the diversion of management’s attention to other business concerns;

 

    unforeseen difficulties in connection with operating in new product areas or new geographic areas;

 

    customer or key employee losses at the acquired businesses; and

 

    the inability to meet the obligations in off-take contracts associated with acquired production plants.

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of our funds and other resources.

If there are significant increases in the cost of raw materials or our suppliers suffer from operating or financial difficulties, we could generate lower revenue, operating profits and cash flows or lose our ability to meet commitments to our customers.

We purchase wood fiber from third-party landowners and other suppliers for use at our production plants. Our reliance on third parties to secure wood fiber exposes us to potential price volatility and unavailability of such raw materials, and the associated costs may exceed our ability to pass through such price increases under our contracts with our customers. Further, delays or disruptions in obtaining wood fiber may result from a number of factors affecting our suppliers, including extreme weather, production or delivery disruptions, inadequate logging capacity, labor disputes, impaired financial condition of a particular supplier, the inability of suppliers to comply with regulatory or sustainability requirements or decreased availability of raw materials. In addition, other companies, whether or not in our industry, could procure wood fiber within our procurement areas and adversely change regional market dynamics, resulting in insufficient quantities of raw material or higher prices. Any of these events could increase our operating costs or prevent us from meeting our commitments to our customers, and thereby could have a material adverse effect on our results of operations, business and financial position, and our ability to make distributions to our unitholders.

Any interruption or delay in the supply of wood fiber, or our inability to obtain wood fiber at acceptable prices in a timely manner, could impair our ability to meet the demands of our customers and expand our operations, which could have a material adverse effect on our results of operations, business and financial position, and our ability to make distributions to our unitholders.

 

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We are exposed to the credit risk of customers for our products, and any material nonpayment or nonperformance by our customers could adversely affect our financial results and cash available for distribution.

We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, whose operations are concentrated in the European power generation industry. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers, or if their creditworthiness deteriorates unexpectedly, any resulting unremedied nonpayment or nonperformance by them could have a material adverse effect on our results of operations, business and financial position, and our ability to make cash distributions to our unitholders.

We could suffer a catastrophic failure of the shiploading equipment at the Port of Chesapeake or Port Panama City or be adversely impacted by a port closure.

A significant portion of our total production is loaded for shipment utilizing automated conveyor and ship loading equipment at the Port of Chesapeake and Port Panama City. Should we suffer a catastrophic failure of this equipment, we could be unable to fulfill off-take obligations or incur substantial additional transportation costs that would reduce cash flow. We may also lose access to the ports or our facilities if they are closed for security or weather-related reasons.

Fluctuations in transportation costs and the availability or reliability of shipping, rail or truck transportation could reduce revenues by causing us to reduce our production or by impairing our ability to deliver products to our customers or the ability of our customers to take delivery.

Disruptions of local or regional transportation services due to shortages of vessels, barges, railcars or trucks, weather-related problems, flooding, drought, accidents, mechanical difficulties, bankruptcy, strikes, lockouts, bottlenecks or other events could temporarily impair our ability to deliver products to our customers and might, in certain circumstances, constitute a force majeure event under our customer contracts, permitting our customers to suspend taking delivery of and paying for our products. In addition, persistent disruptions in marine transportation may force us to halt production as we reach storage capacity at our deep-water marine terminals. Accordingly, if the transportation services we use to transport our products are disrupted, and we are unable to find alternative transportation providers, it could have a material adverse effect on our results of operations, business and financial position, and our ability to make cash distributions to our unitholders.

Our long-term, fixed price off-take contracts with our customers may preclude us from taking advantage of an increase in spot market prices for our products and only partially offset certain cost increases.

Our off-take contracts set base prices subject to annual price escalation and other pricing adjustments for changes in certain of our underlying costs of operations. In periods of increased spot market prices, our revenues could be significantly lower than they would otherwise be as a result of being party to such contracts, reducing the net income and cash available for distribution that we would otherwise generate. In addition, our current and future competitors may be in a better position to take advantage of increases in spot market prices.

Each of our off-take contracts provides for an annual price escalator, and certain of our off-take contracts provide for cost pass-through mechanisms for either stumpage or shipping fuel. However, these cost pass-through mechanisms only pass a portion of our total costs through to our customers. If our operating costs increase significantly during the terms of our off-take contracts beyond the levels of pricing and cost protection afforded to us under the terms of our contracts, our results of operations, business and financial position, and our ability to make cash distributions to our unitholders could be materially adversely affected.

 

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Termination penalties within our off-take contracts may not fully compensate us for total economic losses suffered by us.

Certain of our off-take contracts provide the customer with a right of termination for various events of convenience or changes in law or policy. Although certain of these contracts are subject to certain protective termination payments, the termination payments made by our customers may not fully compensate us for losses resulting from a termination by such counterparty. In each case, we may be unable to re-contract our production at favorable prices or at all, and our results of operations, business and financial position, and our ability to make cash distributions to our unitholders may be materially adversely affected as a result.

We may be required to make substantial capital expenditures to maintain our facilities.

Although we currently use a portion of our cash reserves and cash generated from our operations to maintain, develop and improve our assets and facilities, such investment may, over time, be insufficient to preserve the operating profile required for us to meet our planned profitability. Accordingly, if additional capital expenditures are required, our results of operations, business and financial position, and our ability to make cash distributions to our unitholders may be materially adversely affected.

We compete with other wood pellet producers, and, if growth in domestic and global demand for wood pellets meets or exceeds management’s expectations, the competition within our industry may grow significantly.

We compete with other wood pellet production companies in the United States for the customers to whom we sell our products. Our competitors include Fram Renewable Fuels, LLC, which is privately owned, and Georgia Biomass, LLC, a project owned by RWE Innogy, Rentech, Inc. and its recently-acquired subsidiary New England Wood Pellets and German Pellets, which is owned by Europe’s largest pellet producer, German Pellets GmbH. We anticipate competition from new utility-grade U.S. suppliers in the future, including The Westervelt Company, Inc., the U.S. subsidiaries of European wood pellet producer German Pellets GmbH and Drax Biomass International Inc., which is a U.S. subsidiary of Drax, a utility in the United Kingdom. Competition in our industry is based on price, consistency and quality of product, site location, distribution and logistics capabilities, customer service and reliability of supply. Some of our competitors may have greater financial and other resources than we do, may develop technology superior to ours or may have production plants that are sited in more advantageous locations from a transport cost perspective.

In addition, we expect global demand for solid biomass to increase significantly in the coming years. Worldwide demand for utility-grade wood pellets is projected by Hawkins Wright to grow from 9.9 million MTPY in 2013 to 20.1 million MTPY in 2016 and to 38.0 million MTPY in 2020, representing a CAGR of approximately 21% from 2013 to 2020. This demand growth may lead to a significant increase in the production levels of our existing competitors and may incentivize new, well-capitalized competitors to enter the industry, both of which could reduce the demand and the prices we are able to obtain under future off-take contracts. Significant price decreases or reduced demand could have a material adverse effect on our results of operations, business and financial position, and our ability to pay distributions to our unitholders.

For our products to be acceptable to our customers, they must comply with stringent sustainability requirements, of which some elements are still under development.

Biomass energy generation requires the use of biomass that is from acceptable sources and is demonstrably sustainable. Within Europe (and the United Kingdom, in particular), this is implemented through biomass sustainability criteria, which will become a mandatory element of eligibility for financial subsidies to biomass energy generators in the future. As a biomass fuel supplier, the viability of our business is therefore dependent upon our ability to comply with such requirements. This may restrict the types of biomass we can use and the

 

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geographic regions from which we source our raw materials, and may require us to reduce the greenhouse gas emissions associated with our supply and production processes. Currently, some elements of the criteria with which we will have to comply, including rules relating to forest management practices, are not yet finalized. If more stringent sustainability requirements are adopted in the future, demand for our products could be materially reduced in certain markets, and our results of operations, business and financial position, and our ability to make cash distributions to our unitholders may be materially adversely affected as a result.

Our level of indebtedness may increase and reduce our financial flexibility.

We currently have a Credit and Guaranty Agreement (the “Credit Agreement”) providing for $120.0 million aggregate principal amount of senior secured credit facilities (the “Senior Secured Credit Facilities”). As of June 30, 2014 our total debt was $101.2 million, which was primarily comprised of $93.1 million, net of unamortized discount of $1.9 million, outstanding under our Senior Secured Credit Facilities due 2017, $3.8 million related to a construction loan and working capital line due 2016 related to our Wiggins plant, a note in the amount of $2.0 million due 2017 related to the acquisition of our Amory plant and a promissory note of $0.7 million due 2017 related to the land purchase for the Southampton plant development and other loans totaling $1.6 million. In connection with this offering, we intend to enter into a new credit agreement providing for (i) a $175.0 million term loan facility and (ii) a $40.0 million revolving credit facility, and will use borrowings thereunder to repay all amounts outstanding under the Senior Secured Credit Facilities. In the future, we may incur additional indebtedness in order to make acquisitions or to develop our properties. Our level of indebtedness could affect our operations in several ways, including the following:

 

    a significant portion of our cash flows could be used to service our indebtedness;

 

    the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets, pay distributions and make certain investments;

 

    our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;

 

    a high level of debt would increase our vulnerability to general adverse economic and industry conditions;

 

    a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing; and

 

    a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, general partnership or other purposes.

In addition, borrowings under our Senior Secured Credit Facilities, our new credit facility and other credit facilities we or our subsidiaries may enter into in the future will bear interest at variable rates. If market interest rates increase, such variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow.

In addition to our debt service obligations, our operations require substantial expenditures on a continuing basis. Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, depends on our financial and operating performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt.

 

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An increase in the price or a significant interruption in the supply of electricity could have a material adverse effect on our results of operations.

Our production plants use a substantial amount of electricity. The price and supply of electricity are unpredictable and can fluctuate significantly based on international, political and economic circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, regional production patterns and environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in higher production costs for electricity, which may be passed on to us in whole or in part. A significant increase in the price of electricity or an extended interruption in the supply of electricity to our production plants could have a material adverse effect on our results of operations, cash flows and ability to make cash distributions.

Increases in the price of diesel fuel may adversely affect our results of operations.

Diesel fuel costs generally fluctuate with world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of our control. Our operations are dependent on rolling stock and trucks, and diesel fuel costs are a significant component of the operating expense of these vehicles. In addition, diesel fuel is consumed by our wood suppliers in the harvesting and transport of our raw material and is therefore a component of the delivered cost we pay for wood fiber. It is also consumed by the material handling equipment at our facilities. Accordingly, increased diesel fuel costs could have an adverse effect on our results of operations, cash flows and ability to make cash distributions.

Our business may suffer if we lose, or are unable to attract and retain, key personnel.

We depend to a large extent on the services of our senior management team and other key personnel, and we are seeking to hire several key management personnel in the near term. Members of our senior management and other key employees collectively have extensive expertise in designing, building and operating wood pellet production plants, as well as in negotiating long-term off-take contracts. Competition for management and key personnel is intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have a material adverse effect on our operations and could lead to higher labor costs or the use of less-qualified personnel. In addition, if any of our executives or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel. Our success will be dependent on our ability to continue to attract, employ and retain highly skilled personnel.

Failure to maintain effective quality control systems at our production plants and deep-water marine terminals could have a material adverse effect on our business and operations.

The performance and quality of our products are critical to the success of our business. These factors depend significantly on the effectiveness of our quality control systems which, in turn, depends on a number of factors. These include the design of our quality control systems, our quality training program and our ability to ensure that our employees adhere to our quality control policies and guidelines. Any significant failure or deterioration of our quality control systems could have a material adverse effect on our business, financial condition, results of operations and reputation.

Our operations are subject to operational hazards and downtimes or interruptions, which may have a material adverse effect on our business and results of operation. We may also not be adequately insured against such events.

We produce a combustible product. Fires and explosions have occurred in our industry. As a result, our business could be adversely affected by these and other operational hazards and could suffer catastrophic loss due to unanticipated events such as explosions, fires, natural disasters or severe weather conditions. Severe

 

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weather, such as floods, earthquakes, hurricanes or other catastrophes, or climatic phenomena, such as drought, may impact our operations by causing weather-related damage to our facilities and equipment and impact our customers’ ability to take delivery of our products. Such severe weather may also adversely affect the ability of our suppliers to provide us with the raw materials we require or the ability of vessels to load, transport and unload our product. In addition, our facilities are subject to the risk of unexpected equipment failures. At our production plants, our manufacturing processes are dependent upon critical pieces of equipment, and such equipment may, on occasion, be out of service as a result of such failures. As a result, we may experience material plant shutdowns or periods of reduced production.

Any interference with or curtailment of our operations could result in a loss of productivity, an increase in our operating costs or a breach of our obligations to deliver contracted volumes to our customers. Any breach of our contractual obligations as a result of periods of downtime or reduced production may have a material adverse effect on our business, results of operations, cash flows and ability to make cash distributions.

In addition, we may not be fully insured against all risks incident to our business, including the risk of our operations being interrupted due to severe weather and natural disasters. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies could escalate. In some instances, insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations and cash available for distribution to unitholders.

Our operations are subject to stringent environmental and occupational health and safety laws and regulations that may expose us to significant costs and liabilities.

Our operations are subject to stringent federal, regional, state and local environmental, health and safety laws and regulations. These laws and regulations govern environmental protection, occupational health and safety, the release or discharge of materials into the environment, air emissions, wastewater discharges, the investigation and remediation of contaminated sites and allocation of liability for cleanup of such sites. These laws and regulations may restrict or impact our business in many ways, including by requiring us to acquire permits or other approvals to conduct regulated activities; limiting our air emissions or wastewater discharges or requiring us to install costly equipment to control, reduce or treat such emissions or discharges; imposing requirements on the handling or disposal of wastes; impacting our ability to modify or expand our operations (for example, by limiting or prohibiting construction and operating activities in environmentally sensitive areas); and imposing health and safety requirements for worker protection. We may be required to make significant capital and operating expenditures to comply with these laws and regulations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of investigatory or remedial obligations, suspension or revocation of permits and the issuance of orders limiting or prohibiting some or all of our operations. Adoption of new or modified environmental laws and regulations may impair the operation of our business, delay or prevent expansion of existing facilities or construction of new facilities and otherwise result in increased costs and liabilities, which may be material.

Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and analogous state laws, impose strict as well as joint and several liability without regard to comparative fault. Under these laws, we may be required to remediate contaminated properties currently or formerly operated by us, or facilities of third parties that received waste generated by our operations. Such remediation obligations may be imposed regardless of whether such contamination resulted in whole or in part from the conduct of others and whether such contamination resulted from actions (by us or third parties) that complied with all applicable laws in effect at the time of those actions. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations, including accidental spills or releases in the course of our operations or those of a third party. Although we are not presently aware of any material contamination on our properties or any material remediation liabilities, we cannot assure you that we will not be exposed to significant remediation obligations or liabilities in the future.

 

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Climate change legislation, regulatory initiatives and litigation could result in increased operating costs.

Many nations have agreed to limit emissions of GHGs pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” Although the United States is not currently participating in the Kyoto Protocol, almost half of U.S. states, either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of GHG emission inventories and/or regional GHG cap-and-trade programs. Although neither the U.S. Congress nor the states in which our facilities are located have adopted such legislation at this time, they may do so in the future. In June 2013, the Obama administration proposed a “Climate Action Plan,” a series of initiatives to address GHG emissions that can be taken without legislative action. Although the full impact of the administration’s plan is difficult to predict, it is ultimately likely to include additional restrictions on power plant emissions and more regulations to preserve forest resources, both of which could result in an increase in our operating costs. Previously, the U.S. Environmental Protection Agency adopted GHG regulations under its existing Clean Air Act authority, including regulations requiring monitoring and reporting of GHG emissions and consideration of potential emission controls for certain new or modified facilities. U.S. EPA has recently issued proposed regulations that would limit GHGs from certain existing and new electric generating units, and the Supreme Court has upheld U.S. EPA’s authority to regulate GHG emissions from certain stationary sources. Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, any such future laws or implementing regulations could require us to incur increased operating or maintenance costs, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

Our business and operating results are subject to seasonal fluctuations.

Our business is affected to some extent by seasonal fluctuations. The cost of producing wood pellets tends to be slightly higher in the winter months because the delivered cost of fiber typically increases with wet weather and our raw materials have, on average, higher moisture content during such period of the year, resulting in a lower product yield. In addition, lower ambient temperatures increase the cost of drying wood fiber. As a result of these seasonal fluctuations, comparisons of operating measures between consecutive quarters may not be as meaningful as comparisons between longer reporting periods.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and armed conflicts could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations or prevent our customers from meeting their obligations to us. We could experience loss of business, delays or defaults in payments from customers or disruptions of fuel supplies and markets, including if domestic and global power generators are direct targets or indirect casualties of an act of terror or war. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.

Risks Inherent in an Investment in Us

Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including our sponsor, have conflicts of interest with us and limited duties, and they may favor their own interests to our detriment and that of our unitholders.

Following the offering, our sponsor, Enviva Holdings, will own and control our general partner and will appoint all of the directors of our general partner. Although our general partner has a duty to manage us in a manner that it believes is not adverse to our interest, the executive officers and directors of our general partner

 

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have a fiduciary duty to manage our general partner in a manner beneficial to our sponsor. Therefore, conflicts of interest may arise between our sponsor or any of its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our common unitholders. These conflicts include the following situations, among others:

 

    our general partner is allowed to take into account the interests of parties other than us, such as our sponsor, in exercising certain rights under our partnership agreement;

 

    neither our partnership agreement nor any other agreement requires our sponsor to pursue a business strategy that favors us;

 

    our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty;

 

    except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

    our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

    our general partner determines the amount and timing of any cash expenditure and whether an expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. Please read “How We Make Distributions to Our Partners—Capital Expenditures” for a discussion on when a capital expenditure constitutes a maintenance capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash from operating surplus that is distributed to our unitholders which, in turn, may affect the ability of the subordinated units to convert. Please read “How We Make Distributions to Our Partners—Subordination Period”;

 

    our general partner may cause us to borrow funds in order to permit the payment of cash distributions;

 

    our partnership agreement permits us to distribute up to $         million as operating surplus, even if it is generated from asset sales, borrowings other than working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or the incentive distribution rights;

 

    our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

 

    our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf;

 

    our general partner intends to limit its liability regarding our contractual and other obligations;

 

    our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of the common units;

 

    our general partner controls the enforcement of obligations that it and its affiliates owe to us;

 

    our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

    our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.

 

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In addition, we may compete directly with our sponsor and entities in which it has an interest for acquisition opportunities and potentially will compete with these entities for new business or extensions of the existing services provided by us. Please read “—Our sponsor and other affiliates of our general partner may compete with us” and “Conflicts of Interest and Fiduciary Duties.”

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $         per unit on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion and could elect not to pay distributions for one or more quarters. Please read “Cash Distribution Policy and Restrictions on Distributions.”

In addition, our partnership agreement does not require us to pay any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of our sponsor to the detriment of our common unitholders.

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

We expect to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.

We plan to distribute most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement

 

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permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

    how to allocate business opportunities among us and its affiliates;

 

    whether to exercise its call right;

 

    whether to seek approval of the resolutions of a conflict of interest by the conflicts committee of the board of directors of our general partner;

 

    how to exercise its voting rights with respect to the units it owns;

 

    whether to exercise its registration rights;

 

    whether to elect to reset target distribution levels; and

 

    whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our partnership agreement restricts the remedies available to holders of our units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

 

    whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is generally required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

    our general partner and its officers and directors will not be liable for monetary damages or otherwise to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that such losses or liabilities were the result of conduct in which our general partner or its officers or directors engaged in bad faith, meaning that they believed that the decision was adverse to the interest of the partnership or, with respect to any criminal conduct, with knowledge that such conduct was unlawful; and

 

    our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

  (1) approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

 

  (2) approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, other than one where our general partner is permitted to act in its sole discretion, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any

 

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action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

Our sponsor and other affiliates of our general partner may compete with us.

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner, engaging in those activities incidental to its ownership interest in us and providing management, advisory and administrative services to its affiliates or to other persons. However, affiliates of our general partner, including our sponsor, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. In addition, our sponsor may compete with us for investment opportunities and may own an interest in entities that compete with us.

Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and our sponsor. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

The holder or holders of our incentive distribution rights may elect to cause us to issue common units to it in connection with a resetting of the incentive distribution without the approval of our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

The holder or holders of a majority of our incentive distribution rights (initially our general partner) have the right, at any time when there are no subordinated units outstanding and we have made cash distributions in excess of the then-applicable third target distribution for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution levels at the time of the exercise of the reset election. Following a reset election, a baseline distribution amount will be calculated equal to an amount equal to the prior cash distribution per common unit for the fiscal quarter immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per unit without such conversion. However, our general partner may transfer the incentive distribution rights at any time. It is possible that our general partner or a transferee could exercise this reset election at a time when we are experiencing declines in our aggregate cash distributions or at a time when the holders of the incentive distribution rights expect that we will experience declines in our aggregate cash distributions in the foreseeable future. In such situations, the holders of the incentive distribution rights may be experiencing, or may expect to experience, declines in the cash distributions it receives related to the incentive distribution rights and may therefore desire to be issued our common units, which are entitled to specified priorities with respect to our distributions and which therefore may be more advantageous for them to own in lieu of the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued new common units to the holders of the incentive distribution rights in connection with resetting the target distribution levels. Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

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Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

Compared to the holders of common stock in a corporation, unitholders have limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by our sponsor, as a result of it owning our general partner, and not by our unitholders. Please read “Management—Management of Enviva Partners, LP” and “Certain Relationships and Related Transactions.” Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 23% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, our sponsor will own an aggregate of     % of our common and subordinated units (or     % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will provide our sponsor the ability to prevent the removal of our general partner.

Unitholders will experience immediate and substantial dilution of $         per common unit.

The assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus) exceeds our pro forma net tangible book value of $         per common unit. Based on the assumed initial public offering price of $         per common unit, unitholders will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with generally accepted accounting principles, and not their fair value. Please read “Dilution.”

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the owner of our general partner to transfer its membership interests in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with its own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.

The incentive distribution rights may be transferred to a third party without unitholder consent.

Our general partner may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers the incentive distribution rights to a third party, our

 

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general partner would not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of our sponsor accepting offers made by us relating to assets owned by our sponsor, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from causing us to issue additional common units and then exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Upon consummation of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, our sponsor will own an aggregate of     % of our common and subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our sponsor will own     % of our common units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:

 

    our existing unitholders’ proportionate ownership interest in us will decrease;

 

    the amount of cash available for distribution on each unit may decrease;

 

    because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

    the ratio of taxable income to distributions may increase;

 

    the relative voting strength of each previously outstanding unit may be diminished; and

 

    the market price of the common units may decline.

There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The

 

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issuance by us of units of senior rank may (i) reduce or eliminate the amount of cash available for distribution to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class; or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by our sponsor or other large holders.

After this offering, we will have              common units and              subordinated units outstanding, which includes the              common units we are selling in this offering that may be resold in the public market immediately. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. The              common units (             if the underwriters do not exercise their option to purchase additional common units) that are issued to our sponsor will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. The lock-up agreement with the underwriters may be waived in the discretion of certain of the underwriters. Sales by our sponsor or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to our sponsor. Under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold. Please read “Units Eligible for Future Sale.”

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.

We are obligated under our partnership agreement to reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

There is no existing market for our common units and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly and unitholders could lose all or part of their investment.

Prior to this offering, there has been no public market for the common units. After this offering, there will be only              publicly traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

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The initial public offering price for our common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

    our quarterly distributions;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    announcements by us or our competitors of significant contracts or acquisitions;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    general economic conditions;

 

    the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

    future sales of our common units; and

 

    the other factors described in these “Risk Factors.”

Unitholders may have liability to repay distributions.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

For as long as we are an emerging growth company, we will not be required to comply with certain disclosure requirements that apply to other public companies.

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We will remain an emerging growth company for up to five years, although we will lose that status earlier if we have more than $1.0 billion of revenues in a fiscal year, have more than $700.0 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common units to be less attractive as a result, there may be a less active trading market for our common units and our trading price may be more volatile.

 

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If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. We must comply with Section 404 (except for the requirement for an auditor’s attestation report, as described above) beginning with our fiscal year ending December 31, 2015. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

The New York Stock Exchange does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We have been invited to apply to list our common units on the NYSE. Because we will be a publicly traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Enviva Partners, LP.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various corporate governance practices that will further increase our costs. The amount of our expenses or reserves for expenses, including the costs of being a publicly traded partnership, will reduce the amount of cash we have available for distribution to our unitholders. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a publicly traded partnership.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

 

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We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur approximately $2.0 million of incremental costs per year associated with being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution to you would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a “qualifying income” requirement. Based upon our current operations, we believe we satisfy the qualifying income requirement. We have requested and obtained a favorable private letter ruling from the Internal Revenue Service to the effect that, based on facts presented in the private letter ruling request, our income from processing timber feedstocks into pellets and transporting, storing, marketing and distributing such timber feedstocks and wood pellets will constitute “qualifying income” within the meaning of Section 7704 of the Internal Revenue Code. However, no ruling has been or will be requested regarding our treatment as a partnership for U.S. federal income tax purposes. Please read “Material U.S. Federal Income Tax Consequences” below. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for U.S. federal, state, local or foreign income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law or interpretation on us. At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Specifically, we will initially own assets and conduct business in Mississippi, North Carolina and Virginia, each of which imposes a margin or franchise tax. In the future, we may expand our operations. Imposition of a similar tax on us in other jurisdictions that we may expand to could substantially reduce our cash available for distribution to you.

 

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The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. One such legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. A recent legislative proposal for comprehensive tax reform included a provision that would restrict the activities that generate qualifying income to exclude timber activities. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes. For a discussion of the importance of our treatment as a partnership for federal income purposes, please read “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status” for a further discussion.

If the IRS were to contest the federal income tax positions we take, it may adversely impact the market for our common units, and the costs of any such contest would reduce cash available for distribution to our unitholders.

We have requested and obtained a favorable private letter ruling from the Internal Revenue Service to the effect that, based on facts presented in the private letter ruling request, our income from processing timber feedstocks into pellets and transporting, storing, marketing and distributing such timber feedstocks and wood pellets will constitute “qualifying income” within the meaning of Section 7704 of the Internal Revenue Code. However, no ruling has been or will be requested regarding our treatment as a partnership for U.S. federal income tax purposes. Please read “Material U.S. Federal Income Tax Consequences” below. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes, on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

A tax gain or loss on the disposition of our common units could be more or less than you expect.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a

 

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substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopted.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Allocations Between Transferors and Transferees.”

 

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A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We may adopt certain valuation methodologies that could result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, our sponsor will own     % of the total interests in our capital and profits. Therefore, a transfer by our sponsor of all or a portion of its interests in us could, in conjunction with the trading of common units held by the public, result in a termination of our partnership for federal income tax purposes. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once.

Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns for one calendar year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in taxable income for the unitholder’s taxable year that includes our termination. Our termination would not affect our classification as a partnership for federal income

 

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tax purposes, but it would result in our being treated as a new partnership for U.S. federal income tax purposes following the termination. If we were treated as a new partnership, we would be required to make new tax elections and could be subject to penalties if we were unable to determine that a termination occurred. The IRS recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

You will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements.

We will initially own assets and conduct business in Mississippi, North Carolina and Virginia, each of which currently impose a personal income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all United States federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We intend to use the estimated net proceeds of approximately $             million from this offering (based on an assumed initial offering price of $             per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discount and offering expenses, to pay a distribution to our sponsor related to its contribution of assets to us in connection with this offering. We will not be required to pay additional cash consideration for such contributed assets. Our sponsor intends to use the amounts that it receives from the net proceeds of this offering to finance the construction of a portion of the Wilmington Projects consisting of the first production plant and the deep-water marine terminal.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the underwriters and the remainder, if any, will be issued to our sponsor. Any such units issued to our sponsor will be issued for no additional consideration. If the underwriters exercise their option to purchase                     additional common units in full, the additional net proceeds would be approximately $             million (based upon the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to make a special distribution to our sponsor. If the underwriters do not exercise their option to purchase additional common units, we will issue                     common units to our sponsor upon the option’s expiration. We will not receive any additional consideration from our sponsor in connection with such issuance. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

A $1.00 increase or decrease in the assumed initial public offering price of $             per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount and offering expenses payable by us, to increase or decrease, respectively, by approximately $             million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $             per common unit, would increase net proceeds to us from this offering by approximately $             million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $             decrease in the assumed initial offering price to $             per common unit, would decrease the net proceeds to us from this offering by approximately $             million.

 

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CAPITALIZATION

The following table shows our capitalization as of June 30, 2014:

 

    on an actual basis for our accounting predecessor, Enviva Partners, LP Predecessor; and

 

    on a pro forma basis to reflect the offering of our common units, the other transactions described under “Summary—The Transactions” and the application of the net proceeds from this offering as described under “Use of Proceeds.”

This table is derived from, and should be read together with, the unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary—The Transactions,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2014  
     Actual      Pro Forma  
     (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 4,460       $ 10,422   
  

 

 

    

 

 

 

Long-term debt and capital lease obligations (including current portion):

     

Existing Senior Secured Credit Facilities (1)

   $ 93,052       $ —     

New Credit Facility (1)

     —           170,625   

Other long-term debt and capital lease obligations

     8,135         6,991   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

     101,187         177,616   

Partners’ capital:

     

Limited partners’ capital (2)

     263,983         282,816   

Common unitholders

     —        

Subordinated unitholders

     —        

General partner interest

     —           —     

Noncontrolling partners’ interests

     3,070         3,070   
  

 

 

    

 

 

 

Total partners’ capital

     267,053         285,886   
  

 

 

    

 

 

 

Total capitalization

   $ 368,240       $ 463,502   
  

 

 

    

 

 

 

 

(1) The Senior Secured Credit Facilities outstanding balance of $93.1 million net of unamortized discount of $1.9 million. As of October 27, 2014, we had $93.7 million outstanding under the Senior Secured Credit Facilities, consisting of $90.7 million on the term loan and $3.0 million on the revolver. In connection with this offering, we intend to enter into a new credit facility in the aggregate principal amount of up to $175.0 million term loan facility and a $40.0 million revolving credit facility. The pro forma amount reflects $170.6 million of term borrowings (net of unamortized discount of $4.4 million), (i) $77.1 million of which will be distributed to our sponsor, which will use the cash to repay indebtedness used to fund the acquisition of Enviva Pellets Cottondale, LLC and (ii) $87.4 million of which, along with an existing debt service reserve, will be used to repay all amounts outstanding under the Senior Secured Credit Facilities.
(2) We will convert the limited partner interest held by Enviva Holdings, LP into common units and subordinated units representing an aggregate     % limited partner interest in us.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Assuming an initial public offering price of $             per common unit (the mid-point of the price range set forth on the cover page of this prospectus), on a pro forma basis as of June 30, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $             million, or $             per common unit. Purchasers of our common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

      $                

Pro forma net tangible book value per common unit before the offering (1)

   $                   

Increase in net tangible book value per common unit attributable to purchasers in the offering

     
  

 

 

    

Less: Pro forma net tangible book value per common unit after the offering (2)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering (3)(4)

      $     
     

 

 

 

 

(1) Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (                     common units and                     subordinated units) to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us.
(2) Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (                     common units and                     subordinated units) to be outstanding after the offering.
(3) Each $1.00 increase or decrease in the assumed public offering price of $             per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $             million, or approximately $             per common unit, and dilution per common unit to investors in this offering by approximately $             per common unit, after deducting the estimated underwriting discount and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $             per common unit, would result in a pro forma net tangible book value of approximately $             million, or $             per common unit, and dilution per common unit to investors in this offering would be $             per common unit. Similarly, a decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed public offering price to $             per common unit, would result in an pro forma net tangible book value of approximately $             million, or $             per common unit, and dilution per common unit to investors in this offering would be $             per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price, the number of common units offered by us and other terms of this offering determined at pricing.
(4) Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.

 

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The following table sets forth the number of units that we will issue and the total consideration contributed to us by our sponsor and by the purchasers of our common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units     Total Consideration  
     Number    Percent     Amount    Percent  

Enviva Holdings (1)(2)(3)

                        

Purchasers in the offering

                        
  

 

  

 

 

   

 

  

 

 

 

Total

        100        100
  

 

  

 

 

   

 

  

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, Enviva Holdings will own                     common units and                     subordinated units.
(2) The assets contributed by Enviva Holdings will be recorded at historical cost. The pro forma book value of the consideration provided by Enviva Holdings as of June 30, 2014 would have been approximately $            .
(3) Assumes the underwriters’ option to purchase additional common units is not exercised.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

For additional information regarding our historical consolidated results of operations, you should refer to Enviva Partners, LP Predecessor’s audited consolidated financial statements as of and for the years ended December 31, 2013 and 2012 and unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2014 and 2013.

General

Our Cash Distribution Policy

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute at least the minimum quarterly distribution of $             per unit ($             per unit on an annualized basis) on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. We expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our cash available for distribution resulting from such growth. Our general partner has not established any cash reserves, and does not have any specific types of expenses for which it intends to establish reserves. We expect our general partner may establish reserves for specific purposes, such as major capital expenditures or debt service payments, or may choose to generally reserve cash in the form of excess distribution coverage from time to time for the purpose of maintaining stability or growth in our quarterly distributions. In addition, our general partner may cause us to borrow amounts to fund distributions in quarters when we generate less cash than is necessary to sustain or grow our cash distributions per unit. Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing rather than retaining our cash available for distribution.

The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will make cash distributions to our unitholders. We do not have a legal or contractual obligation to pay distributions quarterly or on any other basis or at our minimum quarterly distribution rate or at any other rate. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

    Our cash distribution policy will be subject to restrictions on distributions under our Credit Agreement, which contains financial tests and covenants that we must satisfy. These financial tests and covenants are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Senior Secured Credit Facilities.” Should we be unable to satisfy these restrictions or if we are otherwise in default under our credit facility, we will be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

 

    Our general partner will have the authority to establish cash reserves for the prudent conduct of our business, including for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish.

 

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    We are obligated under our partnership agreement to reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available to pay distributions to our unitholders.

 

    Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner.

 

    Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

    We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs.

 

    If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “How We Make Distributions To Our Partners—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” We do not anticipate that we will make any distributions from capital surplus.

 

    Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state limited liability company laws and other laws and regulations.

Our Ability to Grow may be Dependent on Our Ability to Access External Expansion Capital

We expect to generally distribute a significant percentage of our cash from operations to our unitholders on a quarterly basis, after the establishment of cash reserves and payment of our expenses. Therefore, our growth may not be as fast as businesses that reinvest most or all of their cash to expand ongoing operations. Moreover, our future growth may be slower than our historical growth. We expect that we will rely primarily upon external financing sources, including bank borrowings and issuances of debt and equity interests, to fund our expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

 

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Our Minimum Quarterly Distribution

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $             per unit for each whole quarter, or $             per unit on an annualized basis. The payment of the full minimum quarterly distribution on all of the common units and subordinated units to be outstanding after completion of this offering would require us to have cash available for distribution of approximately $             million per quarter, or $             million per year. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering, assuming the underwriters do not exercise their option to purchase additional common units, and the cash available for distribution needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:

 

          Distributions  
     Number of Units    One Quarter      Annualized  

Publicly held common units

      $                    $                

Common units held by Enviva Holdings

        

Subordinated units held by Enviva Holdings

        
  

 

  

 

 

    

 

 

 

Total

      $         $     
  

 

  

 

 

    

 

 

 

If the underwriters do not exercise their option to purchase additional common units, we will issue common units to our sponsor, Enviva Holdings, at the expiration of the option period. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the underwriters and the remainder, if any, will be issued to our sponsor. Any such units issued to our sponsor will be issued for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

Our general partner will initially hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0%, of the cash we distribute in excess of $             per unit per quarter.

We expect to pay our distributions on or about the last day of each of February, May, August and November to holders of record on or about the 15th day of each such month. We will adjust the quarterly distribution for the period after the closing of this offering through                     , 2014, based on the actual length of the period.

Subordinated Units

Our sponsor will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that, for any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. When the subordination period ends, all of the subordinated units will convert into an equal number of common units.

To the extent we do not pay the minimum quarterly distribution from operating surplus on our common units, our common unitholders will not be entitled to receive such payments in the future except during the subordination period. To the extent we have cash available for distribution from operating surplus in any future quarter during the subordination period in excess of the amount necessary to pay the minimum quarterly distribution to holders of our common units, we will use this excess cash to pay any distribution arrearages on common units related to prior quarters before any cash distribution is made to holders of subordinated units. Please read “How We Make Distributions To Our Partners—Subordination Period.”

 

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Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014

If we had completed the transactions contemplated in this prospectus on January 1, 2013, our pro forma cash available for distribution for the year ended December 31, 2013 and twelve months ended June 30, 2014 would have been a surplus of approximately $11.1 million and $10.3 million, respectively. In the year ended December 31, 2013 and twelve months ended June 30, 2014, we would have been able to pay only     % and     % of the aggregate minimum quarterly distribution on our common units,         % and         % of the minimum quarterly distribution on our common units and no distributions on our subordinated units for the quarters ended March 31, 2013 and June 30, 2014, respectively, and no distributions on any of our units for the quarters ended June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014.

Our pro forma cash available for distribution is based on our historical consolidated results, adjusted to reflect the addition of incremental general and administrative expenses. Our pro forma cash available for distribution does not purport to present our historical consolidated results of operations. Furthermore, cash available for distribution is a cash concept, while our historical consolidated financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had we been formed in an earlier period.

Following the completion of this offering, we estimate that we will incur $2.0 million of incremental annual general and administrative expenses as a result of operating as a publicly traded partnership, such as expenses associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance expenses, expenses associated with listing on the NYSE, independent auditor fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director and officer compensation. Our unaudited pro forma cash available for distribution should be read together with “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited historical consolidated financial statements of Enviva Partners, LP Predecessor and the notes to those consolidated statements included elsewhere in this prospectus.

 

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The following tables illustrate, on a pro forma basis for each quarter in the year ended December 31, 2013, the amount of cash that would have been available for distribution to our unitholders, assuming that the transactions contemplated in this prospectus had been consummated on January 1, 2013. Certain of the adjustments reflected or presented below are explained in the footnotes to such adjustments.

Enviva Partners, LP

Unaudited Pro Forma Cash Available for Distribution (1)

 

    Three Months Ended     Twelve Months
Ended

December 31,
2013
 
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
   
    (in thousands)  

Revenues

         

Product sales

  $                       $                       $                       $                       $ 300,664   

Other revenue

            4,106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

            304,770   

Cost of goods sold, excluding depreciation and amortization

            249,123   

Depreciation and amortization

            21,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

            270,896   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

            33,874   

General and administrative expenses

            16,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

            17,337   

Interest expense, net (2)

            (7,605

Early retirement of debt obligation

            (9,246

Other income

            1,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

            (15,573

Income from continuing operations

            1,764   

Adjustments to reconcile net income (loss) from continuing operations to Adjusted EBITDA:

         

Add:

         

Depreciation and amortization

            21,858   

Interest expense, net (2)

            7,605   

Non-cash equity compensation

            5   

Early retirement of debt obligation

            9,246   

Tax expense

            23   

Asset impairments and disposals

            635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (3)

            41,136   

Adjustments to reconcile Adjusted EBITDA to pro forma cash available for distribution:

         

Less:

         

Cash interest expense (2)

            9,019   

Changes in operating assets and liabilities

            12,298   

Principal payments on debt

            9,287   

Debt issuance costs (4)

            23   

Expansion capital expenditures (5)

            48,144   

Incremental general and administrative expenses (6)

            2,000   

Add:

         

Long-term borrowings

            23,695   

Issuance of equity capital

            22,030   

Borrowings under revolving line of credit

            5,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma cash available for distribution

  $        $        $        $        $ 11,090   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum quarterly and annual distributions:

         

Minimum quarterly and annual distributions per unit

         

Distributions to public common unitholders

         

Distributions to Enviva Holdings, LP - common units

         

Distributions to Enviva Holdings, LP - subordinated units

         

Total distributions

  $        $        $        $        $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess (shortfall) of cash available for distribution over total distributions

  $        $        $        $        $     

 

(1) Reflects our pro forma operating results for the periods indicated, adjusted to reflect incremental general and administrative expenses.
(2) Interest expense, net and cash interest expense include commitment and administrative agent fees on our Senior Secured Credit Facilities. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our Senior Secured Credit Facilities.
(3) For more information, please read “Summary—Non-GAAP Financial Measures.”
(4) Includes fees and expenses associated with the borrowings under our Senior Secured Credit Facilities.
(5) Reflects actual expansion capital expenditures for the periods presented. Expansion capital expenditures are those cash expenditures, including transaction expenses, made to increase our operating capacity or net income over the long term. Represents capital expenditures to complete the construction of the Northampton plant and the second storage dome at the Port of Chesapeake.
(6) Reflects $2.0 million of incremental general and administrative expenses that we expect to incur as a result of operating as a publicly traded partnership that are not reflected in our historical consolidated financial statements.

 

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Enviva Partners, LP

Unaudited Pro Forma Cash Available for Distribution (1)

 

    Three Months Ended     Twelve Months
Ended

June 30,
2014
 
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
   
Revenues   (in thousands)  

Product sales

  $                       $                       $                       $                       $ 369,747   

Other revenue

            4,861   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

            374,608   

Cost of goods sold, excluding depreciation and amortization

            310,872   

Depreciation and amortization

            23,474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

            334,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

            40,262   

General and administrative expenses

            12,455   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

            27,807   

Interest expense (2)

            (10,065

Other income

            275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

            (9,790

Income from continuing operations

            18,017   

Adjustments to reconcile net income (loss) from continuing operations to Adjusted EBITDA:

         

Add:

         

Depreciation and amortization

            23,552   

Interest expense (2)

            10,065   

Non-cash equity compensation

            4   

Asset impairments and disposals

            (119
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (3)

            51,519   

Adjustments to reconcile Adjusted EBITDA to pro forma cash available for distribution:

         

Less:

         

Cash interest expense (2)

            9,005   

Principal payments on debt

            29,057   

Debt issuance costs (4)

            1   

Expansion capital expenditures (5)

            13,984   

Incremental general and administrative expenses (6)

            2,000   

Add:

         

Changes in operating assets and liabilities

            842   

Borrowings under revolving line of credit

            11,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma cash available for distribution

            10,278   

Minimum quarterly and annual distributions:

         

Minimum quarterly and annual distributions per unit

         

Distributions to public common unitholders

         

Distributions to Enviva Holdings, LP - common units

         

Distributions to Enviva Holdings, LP - subordinated units

         

Total distributions

  $        $        $        $        $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess (shortfall) of cash available for distribution over total distributions

  $        $        $        $        $     

 

(1) Reflects our pro forma operating results for the periods indicated, adjusted to reflect incremental general and administrative expenses.
(2) Interest expense, net and cash interest expense include commitment and administrative agent fees on our Senior Secured Credit Facilities. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our Senior Secured Credit Facilities.
(3) For more information, please read “Summary—Non-GAAP Financial Measures.”
(4) Includes fees and expenses associated with the borrowings under our Senior Secured Credit Facilities.

 

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(5) Reflects actual expansion capital expenditures for the periods presented. Expansion capital expenditures are those cash expenditures, including transaction expenses, made to increase our operating capacity or net income over the long term. Represents capital expenditures to complete the construction of the Northampton plant and the second storage dome at the Port of Chesapeake.
(6) Reflects $2.0 million of incremental general and administrative expenses that we expect to incur as a result of operating as a publicly traded partnership that are not reflected in our historical consolidated financial statements.

Estimated Cash Available for Distribution for the Twelve Months Ending December 31, 2015

Set forth below is a statement of Estimated Cash Available for Distribution that reflects a forecast of our ability to generate sufficient cash to make the minimum quarterly distribution on all of our outstanding limited partner units for the twelve months ending December 31, 2015, based on assumptions we believe to be reasonable. These assumptions include adjustments giving effect to this offering.

Our estimated cash available for distribution reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2015. The assumptions disclosed under “—Assumptions and Considerations” below are those that we believe are significant to our ability to generate such estimated cash available for distribution. We believe our actual results of operations and cash flows for the twelve months ending December 31, 2015 will be sufficient to generate our estimated cash available for distribution for such period; however, we can give you no assurance that such estimated cash available for distribution will be achieved. There will likely be differences between our estimated cash available for distribution for the twelve months ending December 31, 2015 and our actual results for such period and those differences could be material. If we fail to generate the estimated cash available for distribution for the twelve months ending December 31, 2015, we may not be able to pay cash distributions on our common units at the minimum quarterly distribution rate or at any rate.

We do not as a matter of course make public projections as to future operations, earnings or other results. However, management has prepared the estimated cash available for distribution and assumptions set forth below to substantiate our belief that we will have sufficient cash available to make the minimum quarterly distribution to our unitholders for the twelve months ending December 31, 2015. This prospective financial information was not prepared with a view toward compliance with published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the estimated cash available for distribution necessary for us to have sufficient cash available for distribution to pay the full minimum quarterly distribution to all of our unitholders for the twelve months ending December 31, 2015. However, this information is not historical fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. The prospective financial information included in this offering document has been prepared by, and is the responsibility of, our management. KPMG LLP has neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, KPMG LLP does not express an opinion or any other form of assurance with respect thereto. The KPMG LLP report included in this offering document relates to the Enviva Partners, LP Predecessor’s historical consolidated financial information. It does not extend to the prospective financial information and should not be read to do so.

When considering the estimated cash available for distribution set forth below you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from those supporting such estimated available cash. Accordingly, there can be no assurance that the forecast is indicative of our future performance. Inclusion of the forecast in this prospectus is not a representation by any person, including us or the underwriters, that the results in the forecast will be achieved.

 

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We are providing the estimated cash available for distribution and related assumptions for the twelve months ending December 31, 2015 to supplement our historical consolidated financial statements in support of our belief that we will have sufficient available cash to allow us to pay cash distributions on all of our outstanding common and subordinated units for the twelve-month period ending December 31, 2015 at our stated minimum quarterly distribution rate. Please read below under “—Assumptions and Considerations” for further information as to the assumptions we have made for the preparation of the estimated cash available for distribution set forth below. The narrative descriptions of our assumptions in “—Assumptions and Considerations” generally compare our estimated cash available for distribution for the twelve months ending December 31, 2015 with the unaudited pro forma cash available for distribution for the year ended December 31, 2013 and the twelve months ended June 30, 2014 presented under “—Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014.”

We do not undertake any obligation to release publicly the results of any future revisions we may make to the assumptions used in generating our estimated cash available for distribution for the twelve months ending December 31, 2015 or to update those assumptions to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this information.

 

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Enviva Partners, LP

Estimated Cash Available for Distribution

 

                                                                                                                            
    Three Months Ending     Twelve Months
Ending

December 31,
2015
 
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
   
   

(in thousands)

 

Product sales

  $ 104,222      $ 111,599      $ 119,837      $ 115,789      $ 451,447   

Other revenue

    1,220        1,220        1,243        1,243        4,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    105,442        112,819        121,080        117,032        456,373   

Cost of goods sold, excluding depreciation and amortization

    88,015        94,925        102,843        99,061        384,844   

Depreciation and amortization

    5,848        5,701        5,796        6,107        23,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

    93,863        100,626        108,639        105,168        408,296   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  $ 11,579      $ 12,193      $ 12,441      $ 11,864      $ 48,077   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses (1)

    3,026        3,026        2,745        2,745        11,542   

Other income (expense):

       

Interest expense

    2,544        2,543        2,541        2,539        10,167   

Early retirement of debt obligation

    5,227        —          —          —          5,227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 782      $ 6,624      $ 7,155      $ 6,580      $ 21,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to Adjusted EBITDA:

       

Depreciation and amortization expense

  $ 5,858      $ 5,711      $ 5,806      $ 6,117      $ 23,492   

Interest expense

    2,544        2,543        2,541        2,539        10,167   

Non cash compensation

    125        125        125        125        500   

Early retirement of debt obligation

    5,227        —          —          —          5,227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (2)

  $ 14,536      $ 15,003      $ 15,627      $ 15,361      $ 60,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile estimated EBITDA to estimated cash available for distribution:

       

Less:

       

Maintenance capital expenditures

    750        750        750        750        3,000   

Cash interest expense

    2,270        2,269        2,267        2,265        9,071   

Principal payments on debt

    559        550        546        555        2,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated cash available for distribution

  $ 10,957      $ 11,434      $ 12,064      $ 11,791      $ 46,246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum quarterly and annual distributions:

         

Minimum quarterly and annual distributions per unit

         

Distributions to public common unitholders

         

Distributions to Enviva Holdings, LP - common units

         

Distributions to Enviva Holdings, LP - subordinated units

         

Total distributions

  $        $        $        $        $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of cash available for distribution over aggregate distributions

  $        $        $        $        $     

 

(1) Includes general and administrative expenses of $8.7 million allocated from Enviva Holdings and its affiliates and $2.0 million of incremental general and administrative expenses that we expect to incur as a result of operating as a publicly traded partnership.
(2) For more information, please read “Summary—Non-GAAP Financial Measures.”

 

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Assumptions and Considerations

Generally, our forecast for the twelve months ending December 31, 2015 is based on the following assumptions and considerations:

 

    We will sell a total volume of our products equal to the aggregate quantity specified under our off-take contracts and we will meet our contractual delivery obligations.

 

    Our production plants will operate at their planned capacity during the forecast period.

 

    We will operate within our targeted operating expense levels.

We believe that our estimated cash available for distribution for the twelve months ending December 31, 2015 will not be less than $46.2 million. This amount of estimated cash available for distribution is approximately $35.2 and $36.0 million more than the pro forma cash available for distribution we generated for the year ended December 31, 2013 and the twelve months ended June 30, 2014, respectively.

Sales Volume. Our product sales volume for the twelve months ending December 31, 2015 is projected to be approximately 2.2 million metric tons as compared to our pro forma product sales volume of approximately 1.9 million MT for the pro forma twelve months ended June 30, 2014 and 1.5 million MT for the pro forma year ended December 31, 2013. The increased sales volumes are primarily the result of a full run rate on our off-take contracts during the forecast period as compared to the contracted ramp period during both the pro forma twelve months June 30, 2014 and the pro forma year ended December 31, 2013. The higher sales volumes are supported by increased production volume from our Northampton and Ahoskie plants which are expected to operate at full capacity during the forecast period producing an additional 140,000 MT as compared to the pro forma twelve months ended June 30, 2014 and 289,000 MT as compared to the pro forma year ended December 31, 2013. The remainder of the increase is driven by an increase in volumes procured from our sponsor during the forecast period.

Other Revenue. Other revenue is primarily comprised of terminal services, professional and exclusivity fees and product sales for which we are deemed to be an agent of the purchaser. The increase in other revenue is a function of the larger volume in the forecast period and a portion of the purchased tons will be sourced in a manner where we are acting as an agent.

Net Revenue. Our net revenue for the twelve months ending December 31, 2015 is projected to be $456.4 million, compared to $374.6 million for the pro forma twelve months ended June 30, 2014 and $304.8 million for the pro forma year ended December 31, 2013. The revenue increase is primarily the result of a full run rate on our off-take contracts during the forecast period supported by an increase in our plant production volumes and an increase in volumes procured from our sponsor.

Cost of Goods Sold, excluding Depreciation and Amortization. Cost of goods sold excluding depreciation and amortization is projected to increase to $384.8 million for the twelve months ending December 31, 2015, compared to $310.9 million for the pro forma twelve months ended June 30, 2014 and $249.1 million for the pro forma year ended December 31, 2013. The increase is predominantly due to increased product sales as noted above. On a per unit basis, costs will decrease as compared to the pro forma twelve months ended June 30, 2014 and the pro forma year ended December 31, 2013 as increased production volumes will drive increased absorption of fixed costs during the forecast period.

Depreciation and Amortization. Depreciation and amortization for the twelve months ending December 31, 2015 is projected to be $23.5 million, compared to $23.6 million for the pro forma twelve months ended June 30, 2014 and $21.9 million for the pro forma year ended December 31, 2013. The decrease in depreciation and amortization compared to the twelve months ended June 30, 2014 is driven by the amortization of an intangible

 

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asset related to a customer contract that expires in March 2015. The increase in depreciation and amortization compared to the year ended December 31, 2013 is due to a full year of depreciation and amortization expense related to our Northampton plant and Chesapeake terminal storage expansion during the forecast period. The year ended December 31, 2013 includes nine months of depreciation expense related to the Northampton plant and Chesapeake terminal storage expansion as the assets were placed into service during May 2013.

General and Administrative Expenses. General and administrative expenses are projected at $11.5 million for the twelve months ending December 31, 2015, compared to $12.6 million for the pro forma twelve months ended June 30, 2014 and $16.5 million for the pro forma year ended December 31, 2013. The decrease is a function of non-capitalizable costs incurred prior to plant start up for newly constructed facilities, including hiring and training of staff and general overhead expenses incurred in historical periods. Development activities were also included in historical periods. No development or construction activities are expected to be conducted by us on a prospective basis. This decrease is partially offset by the inclusion of $2.0 million in expenses that we expect to incur as a publicly traded limited partnership in the forecast.

Interest. Interest expense and cash interest expense are a function of outstanding indebtedness, principally from borrowings under an anticipated new senior secured credit facility. The credit facility will include $175.0 million of term borrowings and $40.0 million available for borrowings under a revolving line of credit. The term of the facility is expected to be five years and borrowings will bear interest at LIBOR plus 3.75%.

Regulatory, Industry and Economic Factors. Our forecast of results of operations for the twelve months ending December 31, 2015 is based on the following assumptions related to regulatory, industry and economic factors:

 

    There will not be any new federal, state or local regulations affecting our operations or those of our customers, or any new interpretations of existing regulations, that will be materially adverse to our business during the twelve months ending December 31, 2015.

 

    There will not be any material adverse changes affecting our operations or those of our customers during the twelve months ending December 31, 2015.

 

    There will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our facilities or those of third parties on which we depend.

 

    Industry, insurance and overall economic conditions will not change substantially during the twelve months ending December 31, 2015.

 

    There will not be any material nonperformance by our customers.

 

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HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

General

Cash Distribution Policy

Our partnership agreement provides that our general partner will make a determination as to whether to make a distribution, but our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner will adopt a cash distribution policy to be effective as of the closing of this offering that will set forth our general partner’s intention with respect to the distributions to be made to unitholders. Pursuant to our cash distribution policy, within 60 days after the end of each quarter, beginning with the quarter ending                     , we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $             per unit, or $             on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will prorate the distribution for the period after the closing of the offering through                     , 2014.

The board of directors of our general partner may change the foregoing distribution policy at any time and from time to time, and even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner. Our partnership agreement does not contain a requirement for us to pay distributions to our unitholders, and there is no guarantee that we will pay the minimum quarterly distribution, or any distribution, on the units in any quarter. However, our partnership agreement does contain provisions intended to motivate our general partner to make steady, increasing and sustainable distributions over time.

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Operating Surplus and Capital Surplus

General

Any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Distributions from operating surplus are made differently than cash distributions that we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the incentive distribution rights would generally not participate in any capital surplus distributions. Any distribution of capital surplus would result in a reduction of the minimum quarterly distribution and target distribution levels and, if we reduce the minimum quarterly distribution to zero and eliminate any unpaid arrearages, thereafter capital surplus would be distributed as if it were operating surplus and the incentive distribution rights would thereafter be entitled to participate in such distributions. Please see “—Distributions From Capital Surplus.”

Operating Surplus

We define operating surplus as:

 

    $             million (as described below); plus

 

    all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below) and provided that cash receipts from the termination of any hedge contract prior to its stipulated settlement or termination date will be included in equal quarterly installments over the remaining scheduled life of such hedge contract had it not been terminated; plus

 

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    cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period that commences when we enter into a binding obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned; plus

 

    cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above, in each case, in respect of the period that commences when we enter into a binding obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned; less

 

    all of our operating expenditures (as defined below) after the closing of this offering; less

 

    the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

    all working capital borrowings not repaid within twelve months after having been incurred; less

 

    any loss realized on disposition of an investment capital expenditure.

Disbursements made, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period but on or before the date on which cash or cash equivalents will be distributed with respect to such period shall be deemed to have been made, received, established, increased or reduced, for purposes of determining operating surplus, within such period if our general partner so determines. Furthermore, cash received from an interest in an entity for which we account using the equity method will not be included to the extent it exceeds our proportionate share of that entity’s operating surplus (calculated as if the definition of operating surplus applied to such entity from the date of our acquisition of such an interest without any basket similar to that described in the first bullet above). Operating surplus does not reflect cash generated by our operations. For example, it includes a basket of $             million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deducted from operating surplus at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deduction.

We define operating expenditures in our partnership agreement, and it generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under hedge contracts (provided that (1) with respect to amounts paid in connection with the initial purchase of a hedge contract, such amounts will be amortized over the life of the applicable hedge contract and (2) payments made in connection with the termination of any hedge contract prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract), officer compensation, repayment of

 

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working capital borrowings, interest on indebtedness and capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

 

    repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the definition of operating surplus above when such repayment actually occurs;

 

    payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and premium on indebtedness, other than working capital borrowings;

 

    expansion capital expenditures;

 

    investment capital expenditures;

 

    payment of transaction expenses relating to interim capital transactions;

 

    distributions to our partners (including distributions in respect of our incentive distribution rights);

 

    repurchases of equity interests except to fund obligations under employee benefit plans; or

 

    any other expenditures or payments using the proceeds of this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any cash distributed in excess of our operating surplus. Accordingly, capital surplus would generally be generated only by the following (which we refer to as “interim capital transactions”):

 

    borrowings other than working capital borrowings;

 

    sales of our equity interests; and

 

    sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement provides that we treat all cash distributed as coming from operating surplus until the sum of all cash distributed since the closing of this offering (other than any distributions of proceeds of this offering) equals the operating surplus from the closing of this offering. Our partnership agreement provides that we treat any amount distributed in excess of operating surplus, regardless of its source, as distributions of capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not. Maintenance capital expenditures are those cash expenditures made to maintain our long-term operating capacity or net income. Our business, facilities and production equipment are not generally subject to major turnaround, overhaul or rebuilds. Rather, our assets, principally rotating mechanical processing equipment, require tool and die replacement which we expense as we consume the tools. Examples of maintenance capital expenditures include expenditures associated with the replacement of equipment, ductwork or paving to the extent such expenditures are made to maintain our long-term operating capacity or net income. Expenditures made solely for investment purposes will not be considered maintenance capital expenditures.

Expansion capital expenditures are those cash expenditures, including transaction expenses, made to increase our operating capacity or net income over the long term. Examples of expansion capital expenditures

 

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include the acquisition of equipment, development of a new production plant or the expansion of an existing production plant, to the extent such expenditures are expected to expand our long-term operating capacity or net income. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of such acquisition, construction, development or expansion in respect of the period that commences when we enter into a binding obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned. Expenditures made solely for investment purposes will not be considered expansion capital expenditures.

Investment capital expenditures are those capital expenditures, including transaction expenses, that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of an asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity or net income, but which are not expected to expand, for more than the short term, our operating capacity or net income.

As described above, neither investment capital expenditures nor expansion capital expenditures are operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of an acquisition, development or expansion in respect of a period that begins when we enter into a binding obligation for an acquisition, construction, development or expansion and ending on the earlier to occur of the date on which such acquisition, construction, development or expansion commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Cash expenditures that are made in part for maintenance capital purposes, investment capital purposes or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we describe below), the common units will have the right to receive distributions from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient cash from operating surplus to pay the minimum quarterly distribution on the common units.

 

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Determination of Subordination Period

Our sponsor will initially own all of our subordinated units. Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2017, if each of the following has occurred:

 

    distributions from operating surplus on each of the outstanding common and subordinated units equaled or exceeded the sum of the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

    the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distribution on all of the outstanding common and subordinated units during those periods on a fully diluted weighted average basis; and

 

    there are no arrearages in payment of the minimum quarterly distribution on the common units.

For the period after closing of this offering through                     , 2014, our partnership agreement will prorate the minimum quarterly distribution based on the actual length of the period, and use such prorated distribution for all purposes, including in determining whether the test described above has been satisfied.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2015, if each of the following has occurred:

 

    distributions from operating surplus exceeded $         (150.0% of the annualized minimum quarterly distribution) on all outstanding common units and subordinated units for a four-quarter period immediately preceding that date;

 

    the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $         (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

 

    there are no arrearages in payment of the minimum quarterly distributions on the common units.

Conversion Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the successor general partner.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro-rata with the other common units in distributions.

 

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Adjusted Operating Surplus

Adjusted operating surplus is intended to generally reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods if not utilized to pay expenses during that period. Adjusted operating surplus for any period consists of:

 

    operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

    any net increase during that period in working capital borrowings; less

 

    any net decrease during that period in cash reserves for operating expenditures not relating to an operating expenditure made during that period; less

 

    any expenditures that are not operating expenditures solely because of the provision described in the last bullet point describing operating expenditures above; plus

 

    any net decrease during that period in working capital borrowings; plus

 

    any net increase during that period in cash reserves for operating expenditures required by any debt instrument for the repayment of principal, interest or premium; plus

 

    any net decrease made in subsequent periods in cash reserves for operating expenditures initially established during such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.

Any disbursements received, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period that the general partner determines to include in operating surplus for such period shall also be deemed to have been made, received or established, increased or reduced in such period for purposes of determining adjusted operating surplus for such period.

Distributions From Operating Surplus During the Subordination Period

If we make a distribution from operating surplus for any quarter ending before the end of the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

    first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

    second, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

Distributions From Operating Surplus After the Subordination Period

If we make distributions of cash from operating surplus for any quarter ending after the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

    first, to all common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—Incentive Distribution Rights” below.

 

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General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner owns the incentive distribution rights and may in the future own common units or other equity interests in us and will be entitled to receive distributions on any such interests.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest.

If for any quarter:

 

    we have distributed cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

    we have distributed cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then we will make additional distributions from operating surplus for that quarter among the unitholders and the holders of the incentive distribution rights in the following manner:

 

    first, to all unitholders, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

    second, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

    third, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

    thereafter, 50.0% to all common unitholders and subordinated unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

Percentage Allocations of Distributions From Operating Surplus

The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and the holders of our incentive distribution rights based on the specified target distribution levels. The amounts set forth under the column heading “Marginal Percentage Interest in Distributions” are the percentage interests of the holders of our incentive distribution rights and the unitholders in any distributions from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests shown for our unitholders and the holders of our incentive distribution rights for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below assume there are no arrearages on common units.

 

     Total Quarterly Distribution
Per Unit
     Marginal Percentage Interest in
Distributions
 
        Unitholders     IDR Holders  

Minimum Quarterly Distribution

   up to $                      100.0     0

First Target Distribution

   above $              up to $                    100.0     0

Second Target Distribution

   above $              up to $                    85.0     15.0

Third Target Distribution

   above $              up to $                    75.0     25.0

Thereafter

   above $                     50.0     50.0

 

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Incentive Distribution Right Holders’ Right to Reset Incentive Distribution Levels

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right.

The right to reset the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions in excess of the then- applicable third target distribution for the prior four consecutive fiscal quarters. The reset target distribution levels will be higher than the most recent per unit distribution level prior to the reset election and higher than the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following the reset event increase as described below. Because the reset target distribution levels will be higher than the most recent per unit distribution level prior to the reset, if we were to issue additional common units after the reset and maintain the per unit distribution level, no additional incentive distributions would be payable. By contrast, if there were no such reset and we were to issue additional common units and maintain the per unit distribution level, additional incentive distributions would have to be paid based on the additional number of outstanding common units and the percentage interest of the incentive distribution rights above the target distribution levels. Thus, the exercise of the reset right would lower our cost of equity capital. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made.

In connection with the resetting of the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on the formula described below that takes into account the “cash parity” value of the cash distributions related to the incentive distribution rights for the quarter prior to the reset event as compared to the cash distribution per common unit in such quarter.

The number of common units to be issued in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels would equal the quotient determined by dividing (x) the amount of cash distributions received in respect of the incentive distribution rights for the fiscal quarter ended immediately prior to the date of such reset election by (y) the amount of cash distributed per common unit with respect to such quarter.

Following a reset election, a baseline minimum quarterly distribution amount will be calculated as an amount equal to the cash distribution amount per unit for the fiscal quarter immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would make distributions from operating surplus for each quarter thereafter as follows:

 

    first, to all common unitholders, pro rata, until each unitholder receives an amount per unit for that quarter equal to 115.0% of the reset minimum quarterly distribution;

 

    second, 85.0% to all common unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives an amount per unit for that quarter equal to 125.0% of the reset minimum quarterly distribution;

 

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    third, 75.0% to all common unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives an amount per unit for that quarter equal to 150.0% of the reset minimum quarterly distribution; and

 

    thereafter, 50.0% to all common unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

Because a reset election can only occur after the subordination period expires, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

The following table illustrates the percentage allocation of distributions from operating surplus between the unitholders and the holders of our incentive distribution rights at various distribution levels (1) pursuant to the distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (2) following a hypothetical reset of the target distribution levels based on the assumption that the quarterly distribution amount per common unit during the fiscal quarter immediately preceding the reset election was $            .

 

    Quarterly
Distribution Per Unit
Prior to Reset
  Unitholders     Incentive
Distribution
Rights
Holders
    Quarterly Distribution Per
Unit Following
Hypothetical Reset
 

Minimum Quarterly Distribution

  up to $             100.0     0.0     up to $         (1)   

First Target Distribution

  above $         up to $             100.0     0.0   above $          up to $         (2)   

Second Target Distribution

  above $         up to $             85.0     15.0   above $          up to $         (3)   

Third Target Distribution

  above $         up to $             75.0     25.0   above $          up to $         (4)   

Thereafter

  above $             50.0     50.0     above $          

 

(1) This amount is equal to the hypothetical reset minimum quarterly distribution.
(2) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
(4) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and the holders of incentive distribution rights, based on the amount distributed for the quarter immediately prior to the reset. The table assumes that immediately prior to the reset there would be common units outstanding and the distribution to each common unit would be $       for the quarter prior to the reset.

 

    Quarterly Distribution
per Unit Prior to Reset
  Cash
Distributions to
Common
Unitholders Prior
to Reset
    Cash Distributions to
Holders of Incentive
Distribution Rights Prior
to Reset
    Total
Distributions
 

Minimum Quarterly Distribution

  up to $           $                   $ —        $                

First Target Distribution

  above $         up to $               —       

Second Target Distribution

  above $         up to $              

Third Target Distribution

  above $         up to $              

Thereafter

  above $              
   

 

 

   

 

 

   

 

 

 
    $                   $                   $                
   

 

 

   

 

 

   

 

 

 

 

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The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and the holders of incentive distribution rights, with respect to the quarter in which the reset occurs. The table reflects that, as a result of the reset, there would be                      common units outstanding and the distribution to each common unit would be $            . The number of common units to be issued upon the reset was calculated by dividing (1) the amount received in respect of the incentive distribution rights for the quarter prior to the reset as shown in the table above, or $            , by (2) the cash distributed on each common unit for the quarter prior to the reset as shown in the table above, or $            .

 

   

Quarterly Distribution
per Unit

  Cash
Distributions
to Common
Unitholders
Prior to Reset
    Cash Distributions to Holders of
Incentive Distribution Rights After Reset
    Total
Distributions
 
        Common
    Units (1)    
    Incentive
  Distribution  
Rights
    Total    

Minimum Quarterly Distribution

  up to $           $                   $                   $ —        $                   $                

First Target Distribution

  above $         up to $             —          —          —          —          —     

Second Target Distribution

  above $         up to $             —          —          —          —          —     

Third Target Distribution

  above $         up to $             —          —          —          —          —     

Thereafter

  above $             —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $                   $ —        $                   $                   $                
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents distributions in respect of the common units issued upon the reset.

The holders of our incentive distribution rights will be entitled to cause the target distribution levels to be reset on more than one occasion. There are no restrictions on the ability to exercise their reset right multiple times, but the requirements for exercise must be met each time. Because one of the requirements is that we make cash distributions in excess of the then-applicable third target distribution for the prior four consecutive fiscal quarters, a minimum of four quarters must elapse between each reset.

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

Our partnership agreement requires that we make distributions from capital surplus, if any, in the following manner:

 

    first, to all common unitholders and subordinated unitholders, pro rata, until the minimum quarterly distribution is reduced to zero, as described below;

 

    second, to the common unitholders, pro rata, until we distribute for each common unit an amount from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

    thereafter, we will make all distributions from capital surplus as if they were from operating surplus.

Effect of a Distribution From Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution of capital surplus to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

 

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Once we reduce the minimum quarterly distribution and target distribution levels to zero, all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 50.0% is paid to the holder or holders of incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our common units into fewer common units or subdivide our common units into a greater number of common units, our partnership agreement specifies that the following items will be proportionately adjusted:

 

    the minimum quarterly distribution;

 

    the target distribution levels;

 

    the initial unit price, as described below under “—Distributions of Cash Upon Liquidation”;

 

    the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units; and

 

    the number of subordinated units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. We will not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if, as a result of a change in law or interpretation thereof, we or any of our subsidiaries is treated as an association taxable as a corporation or is otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is cash for that quarter (after deducting our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation) and the denominator of which is the sum of (1) cash for that quarter, plus (2) our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the holders of the incentive distribution rights, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of units to a repayment of the initial value contributed by unitholders for their units in this offering, which we refer to as the “initial unit price” for each unit. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain

 

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upon our liquidation to enable the common unitholders to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights.

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in the partnership agreement. If our liquidation occurs before the end of the subordination period, we will generally allocate any gain to the partners in the following manner:

 

    first, to our general partner to the extent of certain prior losses specially allocated to our general partner;

 

    second, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (1) the initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

    third, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (1) the initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

    fourth, to all unitholders, pro rata, until we allocate under this bullet an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;

 

    fifth, 85.0% to all unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until we allocate under this bullet an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights for each quarter of our existence;

 

    sixth, 75.0% to all unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until we allocate under this bullet an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights for each quarter of our existence; and

 

    thereafter, 50.0% to all unitholders, pro rata, and 50.0% to holders of our incentive distribution rights.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the third bullet point above will no longer be applicable.

We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our general partner and the unitholders in the following manner:

 

    first, to holders of subordinated units in proportion to the positive balances in their capital accounts until the capital accounts of the subordinated unitholders have been reduced to zero;

 

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    second, to the holders of common units in proportion to the positive balances in their capital accounts, until the capital accounts of the common unitholders have been reduced to zero; and

 

    thereafter, 100.0% to our general partner.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

We may make special allocations of loss among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for federal income tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the holders of our incentive distribution rights in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and the holders of our incentive distribution rights based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA

Enviva Partners, LP was formed in November 2013 and does not have historical consolidated financial statements. We have not presented historical consolidated financial information for Enviva Partners, LP because we have not had any corporate activity since our formation and we believe that a presentation of the results of Enviva Partners, LP would not be meaningful. Therefore, in this prospectus we present the historical consolidated financial statements of Enviva, LP and its operating subsidiaries, which entities (excluding Enviva Pellets Southampton, LLC) will be transferred by Enviva MLP Holdco, LLC to Enviva Partners, LP upon the closing of this offering. We refer to these entities as “Enviva Partners, LP Predecessor” or “our predecessor.” The following table presents selected historical consolidated financial and operating data of Enviva Partners, LP Predecessor as of the dates and for the periods indicated.

The selected historical consolidated financial data presented as of and for the years ended December 31, 2013 and 2012 are derived from the audited historical consolidated financial statements of Enviva Partners, LP Predecessor that are included elsewhere in this prospectus. The selected historical consolidated financial data presented as of and for the six months ended June 30, 2014 and 2013 are derived from the unaudited condensed historical financial statements of Enviva Partners, LP Predecessor included elsewhere in this prospectus.

The following table presents, in each case for the periods and as of the dates indicated, summary historical combined financial and operating data of our predecessor and summary pro forma combined financial and operating data of Enviva Partners, LP.

The selected pro forma combined financial and operating data presents unaudited pro forma balance sheet data as of June 30, 2014, and statement of operations and other financial and operating data for the year ended December 31, 2013 and six months ended June 30, 2014 of Enviva Partners, LP, based upon our predecessor’s combined historical financial statements after giving pro forma effect to the Transactions described in “Summary—The Transactions.” The pro forma combined financial data assumes that the Transactions had taken place on June 30, 2014, in the case of the pro forma balance sheet, and on January 1, 2013, in the case of the pro forma statement of operations for the year ended December 31, 2013 and the six months ended June 30, 2014. The pro forma balance sheet, statements of operations and other financial and operating data presented are not necessarily indicative of what our actual results of operations would have been as of the date and for the periods indicated, nor do they purport to represent our future results of operations.

For a detailed discussion of the selected historical consolidated financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with “Use of Proceeds,” the audited and unaudited historical consolidated financial statements of Enviva Partners, LP Predecessor included elsewhere in this prospectus and the unaudited pro forma financial statements of Enviva Partners, LP included elsewhere in this prospectus. Among other things, the historical consolidated financial statements include more detailed information regarding the basis of presentation for the information in the following table.

 

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     Enviva Partners, LP Predecessor Historical     Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
    Six Months Ended June
30,
    Year Ended
December 31,
2013
    Six Months Ended
June 30,

2014
 
     2013     2012     2014     2013      
                 (unaudited)              
    

(in thousands)

 

Statement of Operations Data:

            

Product sales

   $ 176,051      $ 100,537      $ 133,146      $ 74,207      $ 300,664      $ 205,582   

Other revenue

     3,836        2,787        1,903        1,188        4,106        2,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     179,887        103,324        135,049        75,395        304,770        207,742   

Costs of goods sold, excluding depreciation and amortization

     152,720        91,761        121,610        67,022        249,123        176,531   

Depreciation and amortization (1)

     11,827        7,454        9,541        4,445        21,773        11,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     164,547        99,215        131,151        71,467        270,896        188,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     15,340        4,109        3,898        3,928        33,874        19,496   

General and administrative expenses

     16,373        21,568        4,562        9,257        16,537        6,151   

Related party monitoring fee

            674                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (1,033     (18,133     (664     (5,329     17,337        13,345   

Other income (expense):

            

Interest expense

     (5,460     (1,237     (4,495     (2,098     (7,605     (4,988

Early retirement of debt obligation

            (837     (73            (9,246       

Other income

     996        447        4        987        1,278        275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (4,464     (1,627     (4,564     (1,111     (15,573     (4,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (5,497     (19,760     (5,228     (6,440     1,764        8,632   

Loss from discontinued operations

            (30,112                            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (5,497     (49,872     (5,228     (6,440     1,764        8,632   

Less net loss attributable to noncontrolling partners’ interests

     58        15,703        42        29        58        42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Enviva Partners, LP

   $ (5,439   $ (34,169   $ (5,186   $ (6,411   $ 1,822      $ 8,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Cash Flow Data:

            

Net cash provided by (used in):

            

Operating activities

   $ (7,577   $ (19,448   $ 19,672      $ (4,726    

Investing activities

     (115,799     (98,134     (12,907     (96,094    

Financing activities

     115,235        118,054        (5,863     103,682       

Other Financial Data:

            

Adjusted EBITDA (2)

   $ 12,101      $ (9,402   $ 8,969      $ 444      $ 41,136      $ 25,401   

Adjusted gross margin per metric ton (2)

   $ 29.18      $ 20.72      $ 19.28      $ 21.25       

Expansion capital expenditures (3)

     124,732        90,471        12,977        63,760       

Operating Data:

            

Total metric tons sold

     931        558        697        394       

 

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     Enviva Partners, LP Predecessor Historical      Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
     Six Months Ended
June 30,
     Year Ended
December 31,
2013
   Six Months Ended
June 30,

2014
 
     2013      2012      2014      2013        
    

(in thousands)

 

Balance Sheet Data (at period end):

                 

Cash and cash equivalents

   $ 3,558       $ 11,699       $ 4,460       $ 14,562          $ 10,422   

Total assets

     400,003         273,636         388,826         390,136            485,889   

Long-term debt and capital lease obligations (including current portion)

     100,524         40,159         101,187         96,497            177,616   

Total liabilities

     128,592         57,678         121,773         130,931            200,003   

Partners’ capital

     271,411         215,958         267,053         259,205            285,886   

 

(1) Excludes depreciation of office furniture and equipment. Such amount is included in general and administrative expenses.
(2) For more information, please read “—Non-GAAP Financial Measures” below.
(3) Expansion capital expenditures are cash expenditures made to increase our long-term operating capacity or net income whether through construction or acquisitions. Please read “How We Make Distributions to Our Partners—Capital Expenditures.”

Non-GAAP Financial Measures

Adjusted EBITDA

We define adjusted EBITDA as income or loss from continuing operations, excluding depreciation and amortization, interest expense, taxes, early retirement of debt obligation, non-cash equity compensation and asset impairments and disposals. Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles (“GAAP”). Management uses adjusted EBITDA as an important indicator of performance.

We believe that the presentation of adjusted EBITDA provides useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to adjusted EBITDA is loss from continuing operations. Our non-GAAP financial measure of adjusted EBITDA should not be considered as an alternative to GAAP loss from continuing operations. Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect loss from continuing operations. You should not consider adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because adjusted EBITDA may be defined differently by other companies in our industry, our definition of adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

 

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The following table presents a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Enviva Partners, LP Predecessor Historical     Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
    Six Months Ended
June 30,
    Year Ended
December 31,
2013
     Six Months Ended
June 30,

2014
 
          2013               2012               2014               2013            
    

(in thousands)

 

Reconciliation of adjusted EBITDA to (loss) income from continuing operations:

             

(Loss) income from continuing operations

   $ (5,497   $ (19,760   $ (5,228   $ (6,440   $ 1,764       $ 8,632   

Depreciation and amortization

     11,887        7,731        9,558        4,479        21,858         11,759   

Interest expense

     5,460        1,237        4,495        2,098        7,605         4,988   

Early retirement of debt obligation

     —          837        73        —          9,246         —     

Non-cash equity compensation

     5        509        1        2        5         1   

Income tax expense

     23        12        8        23        23         —     

Asset impairments and disposals

     223        32        62        282        635         21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 12,101      $ (9,402   $ 8,969      $ 444      $ 41,136       $ 25,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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 depreciation and amortization included in cost of goods sold. We believe adjusted gross margin per metric ton is a meaningful measure because it compares our off-take pricing 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 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.

We believe that the presentation of adjusted gross margin per metric ton will provide useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to adjusted gross margin per metric ton is gross margin. Our non-GAAP financial measure of adjusted gross margin per metric ton should not be considered as an alternative to GAAP gross margin. Adjusted gross margin per metric ton has important limitations as an analytical tool because it excludes some but not all items that affect gross margin. You should not consider adjusted gross margin per metric ton in isolation or as a substitute for analysis of our results as reported under GAAP. Because adjusted gross margin per metric ton may be defined differently by other companies in our industry, our definition of adjusted gross margin per metric ton may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

 

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The following table presents a reconciliation of adjusted gross margin per metric ton to the most directly comparable GAAP financial measure on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Enviva Partners, LP Predecessor Historical      Enviva Partners, LP Pro Forma  
     Year Ended
December 31,
     Six Months Ended
June 30,
     Year Ended
December 31,

2013
     Six Months Ended
June 30,

2014
 
          2013                2012                2014                2013             
    

(in thousands, except per metric ton)

 

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

                 

Metric tons sold

     931         558         697         394         

Gross margin

   $ 15,340       $ 4,109       $ 3,898       $ 3,928       $ 33,874       $ 19,496   

Depreciation and amortization (1)

     11,827         7,454         9,541         4,445        
21,773
  
     11,715   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted gross margin

   $ 27,167       $ 11,563       $ 13,439       $ 8,373       $ 55,647       $ 31,211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted gross margin per metric ton

   $ 29.18       $ 20.72       $ 19.28       $ 21.25         

 

(1) Excludes depreciation of office furniture and equipment. Such amount is included in general and administrative expenses.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with our predecessor’s audited consolidated financial statements as of and for the years ended December 31, 2013 and 2012 and our predecessor’s unaudited condensed consolidated financial statements as of June 30, 2014 and December 31, 2013 and for the six months ended June 30, 2014 and 2013, and the notes thereto, included elsewhere in this prospectus. The information provided below supplements, but does not form part of, our predecessor’s consolidated financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the sections entitled “Risk Factors” and “Forward-Looking Statements” elsewhere in this prospectus.

Basis of Presentation

The following discussion of our historical performance and financial condition is derived from our predecessor’s historical consolidated financial statements. Our sponsor is contributing some but not all its assets and liabilities to us in connection with this offering. Accordingly, the historical financial results discussed below include capital expenditures and other costs related to assets that are not being contributed to us in connection with this offering. For additional information about the assets and liabilities reflected in our sponsors’ financial statements that will not be contributed to us in connection with this offering please read our unaudited pro forma combined financial statements and the notes to those financial statements provided elsewhere in this prospectus. In addition, the historical financial results discussed below do not include the results of Enviva Cottondale, LLC, which was acquired by our sponsor in                  2014. Unless otherwise indicated, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Enviva Partners, LP,” “we,” “our,” “us” or like terms when used in a historical context refer to the business and results of operations of Enviva, LP and its operating subsidiaries and, when used in the present tense or prospectively, those terms refer to Enviva Partners, LP and its subsidiaries following the formation transactions described in “Summary—The Transactions.”

Business Overview

We are the world’s largest supplier by production capacity of utility-grade wood pellets to major power generators. We own and operate five production plants in the Southeastern U.S. that have a combined wood pellet production capacity of 1.7 million metric tons per year (“MTPY”) after giving effect to the transactions described in “Summary—The Transactions.” We also own a dry-bulk, deep-water marine terminal at the Port of Chesapeake (the “Chesapeake terminal”). Under our existing off-take contracts, we are required to deliver pellet quantities approximately equal to all of the production capacity of our production plants plus the pellets we will purchase from our sponsor through 2016. From 2017 through 2021, our contracted quantities are more than half of the production capacity of our production plants. Our off-take contracts provide for sales of 2.2 million MT of wood pellets in 2015 have a weighted average remaining term of 6.1 years from January 1, 2015. We intend to expand our business by taking advantage of the growing demand for our products in Europe and Asia that is being driven by the conversion of coal-fired power generation and combined heat and power plants to co-fired or dedicated biomass-fired plants, principally in Northern Europe and, increasingly, in South Korea and Japan.

 

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How We Evaluate Our Operations

Adjusted Gross Margin per Metric Ton

We use adjusted gross margin per metric ton to measure our financial performance. We define adjusted gross margin as gross margin excluding depreciation and amortization included in cost of goods sold. We believe adjusted gross margin per metric ton is a meaningful measure because it compares our off-take pricing 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 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 view adjusted EBITDA as an important indicator of performance. Consistent with the covenant calculations under our Senior Secured Credit Facilities, we define adjusted EBITDA as income or loss from continuing operations excluding depreciation and amortization, interest expense, taxes, early retirement of debt obligation, non-cash equity compensation and asset impairments and disposals. Adjusted EBITDA is a supplemental measure used by our management and other users of our financial statements such as investors, commercial banks, research analysts and others to assess the financial performance of our assets without regard to financing methods or capital structure.

Non-GAAP Financial Measures

Adjusted gross margin per metric ton and adjusted EBITDA are not financial measures presented in accordance with generally accepted accounting principles (“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 analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider adjusted gross margin per metric ton or adjusted EBITDA 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. For a reconciliation of our non-GAAP financial measures to the most comparable GAAP financial measures, see “Summary—Non-GAAP Financial Measures.”

Factors Impacting Comparability of Our Financial Results

Our future results of operations and cash flows may not be comparable to our historical consolidated results of operations and cash flows, and each period presented in our historical consolidated results of operations and cash flows is not directly comparable, principally for the following reasons:

Our sponsor expects to complete the acquisition of the Cottondale plant in the fourth quarter of 2014. In September 2014, our sponsor signed a definitive agreement to purchase Green Circle Bio Energy, Inc., which owns a 650,000 MTPY production plant in Cottondale, FL. As described in “Summary—The Transactions,” prior to the consummation of this offering, our sponsor will change the name of the entity to Enviva Pellets Cottondale, LLC (“Enviva Cottondale”) and will contribute Enviva Cottondale to Enviva, LP and will contribute Enviva GP, LLC and Enviva, LP and its operating subsidiaries (excluding Enviva Pellets Southampton, LLC) to us. Accordingly, our historical consolidated financial statements for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012 do not reflect revenue or operating costs of the Cottondale plant or costs relating to our sponsor’s acquisition of Green Circle.

 

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Enviva, LP will distribute Enviva Pellets Southampton, LLC to our sponsor prior to the completion of this offering. As described in “Summary—The Transactions,” prior to this offering, Enviva, LP owned Enviva Pellets Southampton, LLC, which owns a 510,000 MTPY production plant located in Southampton, VA. Immediately before the closing of this offering, Enviva, LP will distribute all of the limited liability company interests in Enviva Pellets Southampton, LLC to our sponsor. As a result, our consolidated financial statements for periods following this offering will not include operating costs for the Southampton plant.

We will repay all amounts outstanding under our Senior Secured Credit Facilities and enter into a new credit facility in connection with the closing of this offering. In connection with this offering, as described in “Summary—The Transactions”, we will enter into a credit agreement for a new aggregate $215.0 million senior secured credit facility, comprised of a $175.0 million term loan facility and a $40.0 million revolving credit facility. Accordingly, our historical consolidated financial statements for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012 do not reflect the outstanding debt or the interest expense related to the new credit agreement.

We completed an expansion project at our Ahoskie plant in June 2012. We refer to the period of time of increasing production following the startup of a plant or the completion of a project as the “ramp-up” period. The Ahoskie plant commenced operations in November 2011, and completed both its original and expansion ramp-up periods during 2012. Our consolidated financial statements for 2012 include twelve months of Ahoskie production, but the benefit of increased volume from the expansion project was not realized until the second half of the year. Total 2012 production of 260,000 MT increased to 343,000 MT in 2013. The completion of the Ahoskie plant and its expansion increased our total estimated production capacity (after the ramp-up periods) from 215,000 MTPY to 565,000 MTPY, representing, at the time, a 163% expansion in total estimated production capacity.

We completed construction of our Northampton plant in April 2013. Our first shipment of wood pellets to a customer from our Northampton plant occurred in May 2013. Accordingly, our condensed consolidated financial statements for the six months ended June 30, 2013 include only two months of revenue and operating costs for this plant. Our consolidated financial statements for the year ended December 31, 2013 include eight months of revenue and operating costs, whereas the year ended December 31, 2012 do not include any revenue or operating costs related to the plant. The plant has a production capacity of 500,000 MTPY, and increased our total production capacity from 565,000 MTPY to approximately 1.1 million MTPY, representing an 88% expansion in total production capacity. The plant completed its ramp-up period during the first six months of 2014 and will have a material effect on the volume and cost of goods sold of the wood pellets that we deliver in the future.

We began deliveries under new long-term, firm off-take contracts in May 2013 and June 2013. Our first shipment to Drax occurred in May 2013 and the contracted volume increased in April 2014 to 1.0 million MTPY for the subsequent eight years. The increase in contracted volume was structured to coincide with the startup of the Northampton and Southampton plants. Our first shipment to E.ON occurred in June 2013 and the contract volume is 240,000 MTPY through December 2015. These new contracts, accompanied by our increased production capacity, will have a material effect on our product sales and resulting gross margin.

Revenue and costs for deliveries to customers can vary significantly between periods depending upon the specific shipment and reimbursement for expenses, including the then-current cost of fuel. Depending on the specific off-take contract, shipping terms are either Cost, Insurance and Freight (“CIF”) or Free on Board (“FOB”). Under a CIF contract, we procure and pay for shipping costs which include insurance and all other charges up to the port of destination for the customer. These costs are included in the price to the customer and as such, are included in revenue and cost of goods sold. Under an FOB contract, the customer is responsible for shipping costs directly. We have one FOB contract in connection with which we have subsequently executed an annual shipping contract creating financial and operating obligations and economics similar to a “Cost and Freight” (“C&F”) contract. Our customer shipping terms, as well as the timing of shipments during the year, can result in material fluctuations in our revenue recognition between periods but these terms generally have little

 

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impact on gross margin. During 2012, we made deliveries under a one-year FOB contract for 84,000 MT. Because we were not responsible for shipping the wood pellets to the customer, we did not earn shipping revenue or incur shipping cost for these sales. In comparison to a CIF contract where we are responsible for shipment of the wood pellets, the shipments under the FOB contract in 2012 have significantly less revenue and cost on both a total dollar and a per metric ton basis. With the exception of 84,000 MT shipped under the one-year FOB contract in 2012, we were responsible for shipping product to our customers on all shipments during the years ended December 31, 2013 and 2012 and the six months ended June 30, 2014 and 2013.

Our predecessor distributed certain entities to our sponsor in November 2012, the activities of which are included in discontinued operations for the year ended December 31, 2012. In November 2012, our predecessor undertook a series of transactions whereby it distributed our 100% investment in IHE Holdings, LLC (“IHE Holdings”) and 50% controlling investment in a joint venture that developed biomass fuel for use in the power generation industry to our sponsor. On the date of distribution, IHE Holdings held a 50% controlling investment in Valorbois, which operated a combined heat and power manufacturing plant in Thimister–Clermont, Belgium. We refer to these distribution transactions as the “Reorganization.” Neither distributed entity was engaged in our core business of producing and delivering utility-grade wood pellets. We incurred a $30.1 million loss from discontinued operations for the year ended December 31, 2012. There are no activities related to these entities reflected in our consolidated financial statements for the six months ended June 30, 2014 and the year ended December 31, 2013.

Our historical consolidated financial results include general and administrative expenses related to development activities. We have historically incurred general and administrative expenses in connection with pursuing growth opportunities with new and existing customers and pursuing new plant and port development opportunities. Following the Reorganization in November 2012, entities whose results are not reflected within our historical consolidated financial statements conduct these growth activities. Our historical consolidated financial statements also include additional general and administrative expenses for startup and commissioning activities at our plants prior to beginning production. Startup and commissioning activities include recruiting, hiring and training staff months prior to opening a plant. We have also incurred incremental overhead costs related to our construction activities, including general liability insurance coverage, increased travel costs for site visits as well as other minor expenses related to the project, including those for supplies, tools and temporary administrative support. Our predecessor incurred $6.3 million of plant development costs during the year ended December 31, 2013, of which $4.8 million related to startup and commissioning activities at our Northampton and Southampton plants prior to beginning production and $1.3 million related to overhead costs related to our construction activities. We did not incur any plant development costs during the six months ended June 30, 2014. We do not expect to incur any further general and administrative expenses related to plant development activities as these activities are now undertaken by our sponsor and its affiliates.

As part of the Reorganization, certain assets and related liabilities and personnel pertaining to corporate management and administration were distributed to our sponsor. After the Reorganization, our sponsor now provides corporate management and administrative services on our behalf through a Management Services Agreement. We incur general and administrative costs related to our management services agreement (“MSA”) with our sponsor that covers the corporate salary and overhead expenses associated with our business. The MSA was entered into on November 9, 2012 in connection with the Reorganization and has a term of six years that expires in November 2018. In connection with the Reorganization, we distributed to our sponsor certain assets and related liabilities and personnel pertaining to corporate management and administration. Prior to the Reorganization, we incurred these costs as direct expenses. Prior to 2014, the maximum amount that our sponsor could charge under the MSA as the annual fee and as reimbursement of direct and indirect expenses incurred by the sponsor on our behalf was $7.2 million and $3.0 million, respectively. Beginning in 2014, the then-effective maximum amount that may be charged to us by our sponsor under the MSA for both the annual fee and the expense reimbursement increases 2% each year. In any year of the agreement, our sponsor may choose to charge less than the maximum. Direct and indirect costs and expenses are either directly identifiable or allocated to us by our sponsor. The general method used to allocate direct and indirect costs and expenses is established through

 

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the annual budgeting process. Our sponsor estimates the percentage of employee salary and related benefits, third-party costs, office rent and expenses and any other overhead costs to be provided to us. Each month, our sponsor allocates to us the actual costs accumulated in the financial system based on the estimated budgeted percentage for each type of cost. We are charged for any directly identifiable costs such as goods or services provided to us at our request. We believe the assumptions and allocation were made on a reasonable basis and are the best estimate of those which we would have incurred on a stand-alone basis. For the year ended December 31, 2013 and the six months ended June 30, 2014, we have incurred $8.0 million and $4.3 million, respectively, of expense pursuant to the MSA.

We will incur additional general and administrative expenses as a publicly traded limited partnership that we have not previously incurred. We estimate we will incur approximately $2.0 million in additional general and administrative expenses as a publicly traded limited partnership that we have not previously incurred, including costs associated with compliance under the Securities Exchange Act of 1934, preparation and distribution of annual and quarterly reports, tax returns and Schedule K-1s to our unitholders, investor relations, registrar and transfer agent fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation. These incremental expenses exclude the costs of this offering. Actual costs could differ significantly from our estimate.

How We Generate Revenue

Overview

We primarily earn revenue by supplying wood pellets to our customers under long-term, U.S. dollar-denominated contracts (also referred to as “off-take” contracts). We refer to the structure of our contracts as “take-or-pay” because they include a firm obligation to take a fixed quantity of product at a stated price and provisions that ensure we will be made whole in the case of our customer’s failure to accept all or a part of the contracted volumes or for termination by our customer. Each contract defines the annual volume of wood pellets that the customer is required to purchase and we are required to sell, and the fixed-price per metric ton for product satisfying a base net calorific value and other technical specifications. These prices are fixed for the entire term, subject to annual inflation-based adjustments and price escalators, as well as, in some instances, price adjustments for product specifications and changes in underlying costs. As a result, our revenue over the duration of these contracts may not follow spot market pricing trends. Our revenues from the sale of wood pellets are recognized when the goods are shipped, title passes, the sales price to the customer is fixed and collectability is reasonably assured.

Depending on the specific off-take contract, shipping terms are either Cost, Insurance and Freight (“CIF”) or Free on Board (“FOB”). Under a CIF contract, we procure and pay for shipping costs which include insurance and all other charges up to the port of destination for the customer. These costs are included in the price to the customer and as such, are included in revenue and cost of goods sold. Under an FOB contract, the customer is responsible for shipping costs directly. We have one FOB contract where we have subsequently executed an annual shipping contract creating economics similar to a C&F contract. Our customer shipping terms, as well as the timing of shipments throughout the year, can result in material fluctuations in our revenue recognition between periods but generally have little impact on gross margin.

In addition to producing wood pellets sold under our off-take agreements, we procure and manage delivery of approximately 1.3 million MTPY of wood chips, which our customer uses to fuel two converted coal-fired power plants in Virginia. The procurement of these wood chips and the delivered sale of the product are back-to-back and immediately transfer title and risk of loss from the suppliers to the customer. Thus, the revenue from these transactions is recorded net of costs paid to the suppliers.

The majority of the wood pellets we supply to our customers are produced in our production plants. We also fulfill our contractual commitments and take advantage of dislocation in market supply and demand by