S-1/A 1 d808391ds1a.htm S-1/A S-1/A
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Index to Financial Statements

As filed with the Securities and Exchange Commission on April 20, 2015

Registration No. 333-199625

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

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:

 

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

Tel: (713) 758-2222

Fax: (713) 758-2346

 

Sean T. Wheeler

Debbie P. Yee

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  

Amount to be

Registered(1)

 

Proposed Maximum

Offering Price
Per Share(2)

 

Proposed Maximum

Aggregate
Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common units representing limited partner interests

  11,500,000   $21.00   $241,500,000   $28,062.30

 

 

(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes additional common units that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The Registrant previously paid $11,620 of the total registration fee in connection with the previous filing of this Registration Statement.

 

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 April 20, 2015

PROSPECTUS

 

 

 

LOGO

Enviva Partners, LP

10,000,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units representing limited partner interests. We are offering 10,000,000 common units. No public market currently exists for our common units.

We have been approved 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 $19.00 and $21.00 per common unit.

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 25.

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, 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 $10.37 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 (1)

   $         $     

Proceeds to Enviva Partners, LP (before expenses)

   $         $     

 

(1) Excludes an aggregate structuring fee equal to 0.50% of the gross proceeds of this offering payable by us to Barclays Capital Inc. and Goldman, Sachs & Co. Please read “Underwriting” for additional information regarding underwriting compensation.

The underwriters may purchase up to an additional 1,500,000 common units from us at the public offering price, less the underwriting discount and structuring fee, within 30 days from the date of this prospectus if the underwriters sell more than 10,000,000 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                     , 2015 through the book-entry facilities of The Depository Trust Company.

 

 

 

Barclays                    Goldman, Sachs & Co.            RBC Capital Markets              Citigroup   

 

 

 

J.P. Morgan  

Raymond James

  MUFG   U.S. Capital Advisors

Prospectus dated                     , 2015


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Index to Financial Statements

LOGO


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Index to Financial Statements

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

  2   

Our Relationship with Our Sponsor

  3   

Our Growth Strategy

  3   

Industry Overview

  4   

Business Strategies

  5   

Competitive Strengths

  6   

Our Sponsor’s Retained Assets and Development Projects

  7   

About Our Sponsor’s Owners

  9   

About HNRG

  9   

Risk Factors

  9   

Our Management

  9   

Summary of Conflicts of Interest and Fiduciary Duties

  9   

Principal Executive Offices

  10   

Emerging Growth Company Status

  10   

The Transactions

  11   

Organizational Structure

  13   

The Offering

  15   

Summary Historical Consolidated and Unaudited Pro Forma Financial and Operating Data

  20   

Non-GAAP Financial Measures

  22   

RISK FACTORS

  25   

Risks Inherent in Our Business

  25   

Risks Inherent in an Investment in Us

  38   

Tax Risks to Common Unitholders

  47   

USE OF PROCEEDS

  52   

CAPITALIZATION

  53   

DILUTION

  54   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

  56   

General

  56   

Our Minimum Quarterly Distribution

  58   

Subordinated Units

  58   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2014

  59   

Estimated Cash Available for Distribution for the Twelve Months Ending March 31, 2016

  61   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

  66   

General

  66   

Operating Surplus and Capital Surplus

  66   

 

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Index to Financial Statements

Capital Expenditures

  68   

Subordination Period

  69   

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

  83   

Basis of Presentation

  83   

Business Overview

  83   

How We Evaluate Our Operations

  84   

Factors Impacting Comparability of Our Financial Results

  84   

How We Generate Revenue

  86   

Costs of Conducting Our Business

  87   

Results of Operations

  89   

Liquidity and Capital Resources

  92   

Cash Flows

  93   

Prior Senior Secured Credit Facilities

  94   

New Senior Secured Credit Facilities

  95   

Contractual Obligations

  97   

Quantitative and Qualitative Disclosure of Market Risks

  98   

Internal Controls and Procedures

  99   

Recent Accounting Pronouncements

  99   

Critical Accounting Policies and Estimates

  99   

INDUSTRY OVERVIEW

  103   

Introduction

  103   

Global Demand for Utility-Grade Wood Pellets

  105   

Global Supply of Utility-Grade Wood Pellets

  113   

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

  117   

BUSINESS

  118   

Overview

  118   

Business Strategies

  119   

Competitive Strengths

  120   

Our History

  122   

Our Assets

  122   

Our Relationship with Our Sponsor

  126   

Our Growth Strategy

  126   

Our Sponsor’s Retained Assets and Development Projects

  127   

Customers

  129   

Production Process and Costs

  131   

Competition

  137   

Our Management and Employees

  137   

 

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Index to Financial Statements

Environmental Matters

  138   

Safety and Maintenance

  140   

Seasonality

  141   

Principal Executive Offices

  141   

Legal Proceedings

  141   

MANAGEMENT

  142   

Management of Enviva Partners, LP

  142   

Executive Officers and Directors of Our General Partner

  143   

Director Independence

  147   

Committees of the Board of Directors

  147   

Executive Compensation

  148   

Long-Term Incentive Plan

  151   

Director Compensation

  153   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  154   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  155   

Distributions and Payments to Our General Partner and Its Affiliates

  155   

Agreements with Affiliates in Connection with the Transactions

  156   

Other Transactions with Related Persons

  157   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

  160   

Summary of Applicable Duties

  160   

Conflicts of Interest

  160   

Fiduciary Duties

  165   

DESCRIPTION OF THE COMMON UNITS

  168   

The Units

  168   

Transfer Agent and Registrar

  168   

Transfer of Common Units

  168   

THE PARTNERSHIP AGREEMENT

  170   

Organization and Duration

  170   

Purpose

  170   

Cash Distributions

  170   

Capital Contributions

  170   

Voting Rights

  171   

Applicable Law; Forum, Venue and Jurisdiction

  172   

Limited Liability

  172   

Issuance of Additional Interests

  173   

Amendment of the Partnership Agreement

  174   

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

  176   

Dissolution

  176   

Liquidation and Distribution of Proceeds

  177   

Withdrawal or Removal of Our General Partner

  177   

Transfer of General Partner Interest

  178   

Transfer of Ownership Interests in the General Partner

  178   

Transfer of Subordinated Units and Incentive Distribution Rights

  178   

Change of Management Provisions

  179   

Limited Call Right

  179   

Non-Taxpaying Holders; Redemption

  180   

Non-Citizen Assignees; Redemption

  180   

Meetings; Voting

  180   

Voting Rights of Incentive Distribution Rights

  181   

 

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Index to Financial Statements

Status as Limited Partner

  181   

Indemnification

  182   

Reimbursement of Expenses

  182   

Books and Reports

  182   

Right to Inspect Our Books and Records

  183   

Registration Rights

  183   

UNITS ELIGIBLE FOR FUTURE SALE

  184   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

  186   

Taxation of the Partnership

  187   

Tax Consequences of Unit Ownership

  188   

Tax Treatment of Operations

  192   

Disposition of Units

  193   

Uniformity of Units

  195   

Tax-Exempt Organizations and Other Investors

  196   

Administrative Matters

  196   

State, Local and Other Tax Considerations

  198   

INVESTMENT IN ENVIVA PARTNERS, LP BY EMPLOYEE BENEFIT PLANS

  199   

General Fiduciary Matters

  199   

Prohibited Transaction Issues

  199   

Plan Asset Issues

  200   

UNDERWRITING

  201   

Commissions and Expenses

  201   

Option to Purchase Additional Common Units

  202   

Lock-Up Agreements

  202   

Offering Price Determination

  202   

Indemnification

  203   

Stabilization, Short Positions and Penalty Bids

  203   

Electronic Distribution

  203   

New York Stock Exchange

  204   

Discretionary Sales

  204   

Stamp Taxes

  204   

Relationships

  204   

Direct Participation Program Requirements

  204   

Selling Restrictions

  205   

VALIDITY OF OUR COMMON UNITS

  206   

EXPERTS

  206   

WHERE YOU CAN FIND MORE INFORMATION

  206   

FORWARD-LOOKING STATEMENTS

  208   

INDEX TO FINANCIAL STATEMENTS

  F-1   

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

  A-i    

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 contributed to Enviva Partners, LP in April 2015 (other than Enviva Pellets Southampton, LLC). 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 subsidiaries Enviva MLP Holdco, LLC and Enviva Development Holdings, 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. Enviva Pellets Southampton, LLC is owned by Enviva Wilmington Holdings, LLC, a joint venture between our sponsor, Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company. References in this prospectus to the “Hancock JV” refer to Enviva Wilmington Holdings, LLC. 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 13 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 January 2015 and contributed it to us in April 2015. Prior to the consummation of this offering, 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 $20.00 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 15% 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 approximately 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 approximately 21% from 2014 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.

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 $0.4125 per unit ($1.65 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 sponsor, a portfolio company of the Riverstone Funds, will grant us a five-year right of first offer to acquire certain assets that it may elect to sell. The right of first offer will apply to (i) a fully-contracted and fully-operational production plant located in Southampton County, VA (the “Southampton plant”), (ii) a fully-contracted production plant located in Sampson County, NC (the “Sampson plant”) and a deep-water marine terminal located in Wilmington, NC (the “Wilmington terminal”), both of which currently are under construction, and (iii) any similar assets that our sponsor may develop or acquire in the future. The Southampton plant, the Sampson plant and the Wilmington

 

 

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Index to Financial Statements

terminal are held through a joint venture between our sponsor and affiliates of John Hancock Life Insurance Company (the “Hancock JV”). Our sponsor has the right to compel the Hancock JV to sell its assets to us if certain investment returns are achieved.

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 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 18.8% of total European market demand in 2014. 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 the Southampton plant. Our sponsor acquired the Cottondale plant in January 2015.

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 acquired the Cottondale plant in January 2015, and the plant was contributed to us in April 2015.

Production from our Ahoskie and Northampton plants and the 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 contract.

We have U.S. dollar-denominated, take-or-pay off-take contracts with creditworthy counterparties, including large European power generators such as Drax Power Limited (“Drax”), GDF SUEZ Energy Management Trading (“GDF”) and E.ON UK PLC (“E.ON”). Under our existing off-take contracts, we are required to deliver through 2016 pellet quantities approximately equal to all of the production capacity of our production plants plus the pellets we will purchase from the Hancock JV. From 2017 through 2021, our contracted quantities are more than half of the current production capacity of our production plants. Our off-take

 

 

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contracts provide for sales of 2.3 million metric tons (“MT”) of wood pellets in 2015 and have a weighted average remaining term of 5.7 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 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 Relationship with Our Sponsor

One of our principal strengths is our relationship with Enviva Holdings. The Riverstone Funds became the majority owners of our sponsor in March 2010. Our sponsor has grown the business being contributed to us into the world’s largest supplier by production capacity of utility-grade wood pellets.

At the closing of this offering, our sponsor will own approximately 16.0% 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 those pursuant to the right of first offer it will grant us in connection with the closing of this offering.

In November 2014, our sponsor entered into the Hancock JV with Hancock Natural Resource Group, Inc. (“HNRG”) and certain other affiliates of John Hancock Life Insurance Company. The Hancock JV owns the Southampton plant and has commenced construction of the Sampson plant and the Wilmington terminal. We refer to the Sampson plant and the Wilmington terminal, together with two other 500,000 MTPY production plants under development, as the “Wilmington Projects.” The Wilmington Projects are described below under “—Our Sponsor’s Retained Assets and Development Projects—Wilmington Projects.” Our sponsor is the managing member and operator of the Hancock JV and is responsible for managing the activities of the Hancock JV, including the development and construction of the Hancock JV’s development projects.

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 11.5 million MTPY in 2014 to 36.1 million MTPY in 2020, primarily as a result of demand growth in Northern Europe, South Korea and Japan. Given the limited current supply available,

 

 

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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 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 five-year 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 or the Hancock JV may develop or acquire and elect to sell (please read “—Our Sponsor’s Retained Assets and Development Projects”); and

 

    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.

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 approximately 11.5 million MTPY in 2014 to 18.6 million MTPY in 2016 and to 36.1 million MTPY in 2020. This represents a CAGR of approximately 21% from 2014 to 2020. Europe is expected to constitute the most significant portion of 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 6.5 million MT in 2014, which equates to a CAGR of 30%. 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 and to 60% in 2014.

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 or the introduction of taxes or other restrictions on fossil fuel usage or emissions of GHGs and other pollutants.

 

 

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Although worldwide demand for utility-grade wood pellets is expected to be 36.1 million MTPY by 2020, production capacity as of December 31, 2014 is estimated by Hawkins Wright to be only 11.6 million MTPY. Identified wood pellet projects presently under construction or that have committed sources of financing are expected to raise production capacity to only 16.9 million MTPY by the end of 2016. The resulting 19.2 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 14.3 million MT in 2014, and this is projected by Hawkins Wright to grow to approximately 25.0 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.

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 the Hancock JV’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, for a period of five years following the closing of this offering, to acquire the Southampton plant, the Wilmington Projects discussed below, as well as any completed development project that it or the Hancock JV may elect to sell. We refer to acquisitions from our sponsor or the Hancock JV 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 the Cottondale plant in January 2015. 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.

 

 

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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, 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 24 employees with an average of over 22 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

 

 

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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. Our sponsor is also the managing member and operator of the Hancock JV, a joint venture between our sponsor, HNRG and certain other affiliates of John Hancock Life Insurance Company. The Hancock JV owns a 510,000 MTPY production plant located in Southampton, VA, and our sponsor and the Hancock JV are 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. The Hancock JV has commenced construction of the Sampson plant and Wilmington terminal, which are expected to begin commercial operations in early 2016. Our sponsor will grant us a five-year right of first offer on the Southampton plant, the Wilmington Projects and similar assets that it or the Hancock JV may develop or acquire and elect to sell. As the owner of approximately 16.0% 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.

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 five-year 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 or the Hancock JV may develop or acquire and elect to sell. We expect to pursue the acquisition of such assets to the extent that they are supported by long-term off-take contracts with creditworthy counterparties and 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

The Hancock JV is party to two additional take-or-pay off-take contracts comprising nearly one million MTPY of long-duration sales volumes.

First, the Hancock JV is party to a ten-year take-or-pay off-take contract with Drax pursuant to which it will supply 385,000 MT for the first delivery year and 500,000 MTPY for years two through ten. This contract will commence on December 1, 2015.

 

 

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Second, the Hancock JV is party to 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 MT 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. In April 2015, the entity that owns the Southampton plant was conveyed to the Hancock JV. Production from the Southampton plant is exported from our Chesapeake terminal. Our sponsor expects that the Southampton plant should generate annual adjusted EBITDA of approximately $20.0 million and should incur approximately $0.9 million of annual maintenance capital expenditures. Our sponsor has indicated that it will assign the Hancock JV’s Drax contract in connection with any sale of the Southampton plant.

Wilmington Projects

Our sponsor and the Hancock JV are actively developing a total of three new 500,000 MTPY production plants and a deep-water marine terminal in the Wilmington, NC region, which we refer to as the Wilmington Projects. The three production plants, which are strategically sited in attractive wood fiber baskets in close proximity to the Wilmington terminal, will be constructed using our “build and copy” approach, including substantially the same design and equipment as the Northampton and Southampton plants. The Hancock JV owns the plant sites for the two production plants and has entered into a long-term lease agreement for the site on which it is constructing the Wilmington terminal at the Port of Wilmington in Wilmington, NC. The Hancock JV has also entered into contracts for most of the major equipment for and has commenced construction of the Sampson plant and the Wilmington terminal.

Our sponsor expects the Sampson plant and the Wilmington terminal will begin commercial operations in early 2016 and should generate annual adjusted EBITDA of approximately $20.7 million and $7.0 million, respectively, and should incur annual maintenance capital expenditures of approximately $1.1 million and $0.5 million, respectively. Our sponsor has indicated that it will assign the Hancock JV’s DONG Energy contract in connection with any sale of the Sampson plant.

Our sponsor’s estimates of annual adjusted EBITDA and maintenance capital expenditures for each of the Southampton plant, the Sampson plant and the Wilmington terminal are based on numerous assumptions that are subject to significant risks and uncertainties. For more information, please read “Business—Our Sponsor’s Retained Assets and Development Projects—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. HNRG has the right to invest in these projects on substantially the same terms that it invested in the Hancock JV. 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 or the Hancock JV in the future, there can be no assurance that our sponsor

 

 

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or the Hancock JV will be successful in completing their development projects or that they will decide to sell assets or completed development projects to us.

About Our Sponsor’s Owners

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. As of December 31, 2014, the Riverstone Funds have invested net equity of $348.5 million in Enviva Holdings. Riverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with approximately $30.0 billion of equity capital raised. Riverstone conducts buyout and growth capital investments in the exploration and 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 $28.0 billion to 116 investments in North America, Latin America, Europe, Africa and Asia as of January 31, 2015.

About HNRG

HNRG is the world’s largest timberland investment manager, with approximately $12.0 billion and 6.7 million acres of timberlands under management. HNRG is a wholly-owned subsidiary of Manulife Financial Corporation, a leading Canada-based financial services group with approximately $590.0 billion of assets under management.

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.”

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.

 

 

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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;

 

    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.

 

 

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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.

Prior to the closing of this offering, the following transactions (the “Initial Transactions”) occurred:

 

    Enviva, LP conveyed its interests in Enviva Pellets Southampton, LLC, which owns the 510,000 MTPY Southampton plant, to the Hancock JV;

 

    Enviva, LP distributed all cash and cash equivalents, including accounts receivable, to our sponsor;

 

    our sponsor contributed its interests in Enviva Pellets Cottondale, LLC to us;

 

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

 

    we entered into a credit agreement for a new aggregate $199.5 million senior secured credit facilities, comprised of a $174.5 million term loan facility and a $25.0 million revolving credit facility and paid $4.5 million of fees and expenses as a result of entering into the new senior secured credit facilities; and

 

    we used $82.2 million from borrowings under the new term loan facility to repay all outstanding indebtedness under our prior senior secured credit facilities and related accrued interest expense.

In connection with or following the closing of this offering, the following transactions (together with the Initial Transactions, the “Transactions”) will occur:

 

    we will issue to our sponsor 1,905,138 common units (assuming the underwriters do not exercise their option to purchase additional common units as described below) and 11,905,138 subordinated units;

 

    we will issue the incentive distribution rights to our sponsor;

 

    we will issue 10,000,000 common units to the public;

 

    we will receive gross proceeds of $200.0 million from the issuance and sale of 10,000,000 common units at an assumed initial offering price of $20.00 per unit (the mid-point of the price range set forth on the cover page of this prospectus);

 

    we will use $13.0 million of the proceeds from this offering to pay the underwriting discount and structuring fee and we will use $1.5 million to pay estimated offering expenses; and

 

    we will use $185.5 million of the proceeds from this offering (i) to pay, together with borrowings under the new term loan facility, a $144.5 million distribution to our sponsor, (ii) to repay $81.9 million of indebtedness related to the acquisition of our Cottondale plant and (iii) for general partnership purposes, including future acquisitions.

 

 

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We have granted the underwriters a 30-day option to purchase up to 1,500,000 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.

 

 

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Organizational Structure

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

 

LOGO

 

 

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Public Common Units

  10,000,000      42.0 %(1) 

Interests of Enviva Holdings:

Common Units

  1,905,138      8.0 %(1) 

Subordinated Units

  11,905,138      50.0

Non-Economic General Partner Interest

  0.0 %(2) 

Incentive Distribution Rights

  —   (3) 
  

 

 

    

 

 

 
  23,810,276      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

10,000,000 common units.

 

 11,500,000 common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

11,905,138 common units and 11,905,138 subordinated units for a total of 23,810,276 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 $185.5 million from this offering (based on an assumed initial offering price of $20.00 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 structuring fee and offering expenses, to (i) pay, together with borrowings of $85.9 million under our new term loan facility, a $144.5 million distribution to our sponsor related to its contribution of assets to us in connection with this offering, a portion of which is intended as a reimbursement of capital expenditures of our sponsor, (ii) repay $81.9 million of indebtedness related to the acquisition of our Cottondale plant and (iii) retain $45.0 million for general partnership purposes, including future acquisitions. 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 $28.1 million (based on an assumed initial offering price of $20.00 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.”

 

Cash distributions

Within 60 days after the end of each quarter, beginning with the quarter ending June 30, 2015, we expect to make a minimum quarterly distribution of $0.4125 per common unit and subordinated unit ($1.65 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 June 30, 2015, based on the actual length of that period.

 

 

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  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 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 $0.4125 plus any arrearages from prior quarters;

 

    second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.4125; and

 

    third, to the holders of common units and subordinated units pro rata until each has received a distribution of $0.4744.

 

  If cash distributions to our unitholders exceed $0.4744 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 $0.4744 up to $0.5156

     85.0     15.0

above $0.5156 up to $0.6188

     75.0     25.0

above $0.6188

     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 $0.4125 on all of our common units and subordinated units for the twelve months ending March 31, 2016. 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.”

 

 

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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 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 $1.65 (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 March 31, 2018 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 $2.475 (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 March 31, 2016 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

 

 

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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 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 manages and operates 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 58.0% of our outstanding units (or 51.7% 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 December 31, 2018, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than

 

 

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20% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.65 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.33 per unit. Thereafter, the ratio of allocable taxable 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 approved 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, which is owned by Enviva Wilmington Holdings, LLC, a joint venture between a wholly-owned subsidiary of Enviva Holdings, LP, Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company) were transferred by Enviva MLP Holdco, LLC to Enviva Partners, LP prior to this offering in April 2015. We refer to these entities as “Enviva Partners, LP Predecessor” or “our predecessor.” The following table presents summary historical consolidated financial and operating data of Enviva Partners, LP Predecessor and summary pro forma combined financial and operating data of Enviva Partners, LP 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, 2014 and 2013 is derived from the audited historical consolidated financial statements of Enviva Partners, LP Predecessor that are included elsewhere in this prospectus.

The summary pro forma combined financial and operating data presents unaudited pro forma balance sheet data as of December 31, 2014, and statement of operations and other financial and operating data for the year ended December 31, 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 December 31, 2014, in the case of the pro forma balance sheet, and on January 1, 2014, in the case of the pro forma statement of operations for the year ended December 31, 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
    Year Ended
December 31,

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

Statement of Operations Data:

      

Product sales

   $  286,641      $ 176,051      $ 429,338   

Other revenue

     3,495        3,836        3,941   
  

 

 

   

 

 

   

 

 

 

Net revenue

  290,136      179,887      433,279   

Costs of goods sold, excluding depreciation and amortization

  251,058      152,720      364,043   

Depreciation and amortization (1)

  18,971      11,827      25,945   
  

 

 

   

 

 

   

 

 

 

Total cost of goods sold

  270,029      164,547      389,988   
  

 

 

   

 

 

   

 

 

 

Gross margin

  20,107      15,340      43,291   

General and administrative expenses

  11,132      16,373      14,184   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  8,975      (1,033   29,107   

Other income (expense):

Interest expense

  (8,724   (5,460   (10,938

Early retirement of debt obligation

  (73   —        (7,248

Other income

  7      996      399   
  

 

 

   

 

 

   

 

 

 

Total other expense, net

  (8,790   (4,464   (17,787
  

 

 

   

 

 

   

 

 

 

Net income (loss)

  185      (5,497   11,320   

Less loss attributable to noncontrolling partners’ interests

  79      58      79   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Enviva Partners, LP

$ 264    $ (5,439 $ 11,399   
  

 

 

   

 

 

   

 

 

 

Pro forma net income per limited partner unit:

Common unit

  $0.48   
      

 

 

 

Subordinated unit

  $0.48   
      

 

 

 

Statement of Cash Flow Data:

Net cash provided by (used in):

Operating activities

$ 29,434    $ (7,577

Investing activities

  (14,664   (115,799

Financing activities

  (17,736   115,235   

Other Financial Data:

Adjusted EBITDA (2)

$ 28,348    $ 12,101    $ 55,946   

Adjusted gross margin per metric ton (2)

$ 25.91    $ 29.18   

Expansion capital expenditures (3)

  14,733      124,732   

 

 

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     Enviva Partners, LP Predecessor
Historical
     Enviva Partners, LP
Pro Forma
 
     Year Ended
December 31
     Year Ended
December 31,

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

Operating Data:

        

Total metric tons sold

     1,508         931      

Balance Sheet Data (at period end):

        

Cash and cash equivalents

   $ 592       $ 3,558       $ 60,602   

Total assets

     384,489         400,003         505,571   

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

     94,075         100,524         178,757   

Total liabilities

     109,961         128,592         198,059   

Partners’ capital

     274,528         271,411         307,512   

 

(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 net income or loss 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,     Year Ended
December 31,

        2014        
 
             2014                      2013            
           (unaudited)  
     (in thousands)  

Reconciliation of adjusted EBITDA to net income (loss):

       

Net income (loss)

   $ 185       $ (5,497   $ 11,320   

Depreciation and amortization

     19,009         11,887        26,073   

Interest expense

     8,724         5,460        10,938   

Early retirement of debt obligation

     73         —          7,248   

Non-cash equity compensation

     2         5        2   

Income tax expense

     15         23        15   

Asset impairments and disposals

     340         223        350   
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

$ 28,348    $ 12,101    $ 55,946   
  

 

 

    

 

 

   

 

 

 

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 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,
     Year Ended
December 31,
        2014        
 
             2014                      2013             
                   (unaudited)  
     (in thousands, except per metric ton)  

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

        

Metric tons sold

     1,508         931      

Gross margin

   $ 20,107       $ 15,340       $ 43,291   

Depreciation and amortization (1)

     18,971         11,827         25,945   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin

$ 39,078    $ 27,167    $ 69,236   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin per metric ton

$ 25.91    $ 29.18   

 

  (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 $0.4125 per unit, or $1.65 per unit per year, which will require us to have cash available for distribution of approximately $9.8 million per quarter, or $39.3 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;

 

    late delivery of supplies;

 

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

 

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    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, 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 $9.8 million. The amount of pro forma cash available for distribution generated during the quarters ended March 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014 was $6.9 million, $16.9 million, $7.5 million and $2.4 million, respectively. Such amounts would have allowed us to pay only 100.0% and 40.5% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended March 31, 2014, 100.0% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended June 30, 2014, only 100.0% and 52.7% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended September 30, 2014 and only 48.9% and 0% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended December 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, 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.

 

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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 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, 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 a net loss of $5.5 million for the year ended December 31, 2013. 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” and our sponsor’s estimates of annual adjusted EBITDA and maintenance capital expenditures generated by certain of its assets are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results and amounts 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 March 31, 2016. 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.”

We include in this prospectus our sponsor’s estimates of annual adjusted EBITDA generated by, and maintenance capital expenditures for, each of the Southampton plant, the Sampson plant and the Wilmington terminal, which will be subject to our right of first offer. While management believes that our sponsor’s estimates are reasonable, the estimates are based on numerous assumptions that are subject to significant business, economic, operational, regulatory and other risks and uncertainties that could cause such estimates to differ materially, including the factors described above in “—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” as they apply to our sponsor. If the actual amounts of annual adjusted EBITDA are materially lower, and/or the actual amounts of maintenance capital expenditures are materially higher, these assets, at the time they are offered to us, may not be as attractive as we currently anticipate.

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 Drax, GDF and E.ON represented 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

 

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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.

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.

 

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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, U.S. 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 is difficult to predict, particularly in light of the possibility of further hearings in Center for Biological Diversity v. EPA after the decision in UARG v. EPA. In November 2014, U.S. EPA released a revised methodological framework for assessing biogenic carbon dioxide emissions from stationary sources. U.S. EPA also released a memorandum explaining that it expects to recognize biogenic carbon dioxide emissions and climate policy benefits of waste-derived and certain forest-derived industrial byproduct feedstocks when considering state compliance plans under the Clean Power Plan and the PSD program going forward. The updated draft framework has been submitted to U.S. EPA’s Scientific Advisory Board and is subject to further review and possible changes. Nevertheless, 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

 

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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.

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. EPA, environmental groups contested the U.S. EPA’s decision to defer regulation of carbon dioxide emissions from biomass-fired power plants. It is possible that the continued 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 or the Hancock JV’s 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 sponsor may not offer its assets or the assets of the Hancock JV for sale;

 

    our failure or inability to exercise our right of first offer with respect to any asset that our sponsor offers, or compels the Hancock JV to offer, 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.

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

 

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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.

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.

 

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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 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 approximately 11.5 million MTPY in 2014 to 18.6 million MTPY in 2016 and to 36.1 million MTPY in 2020, representing a CAGR of approximately 21% from 2014 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 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.

As of December 31, 2014, we had a Credit and Guaranty Agreement (the “Prior Credit Agreement”) providing for $120.0 million aggregate principal amount of senior secured credit facilities (the “Prior Senior Secured Credit Facilities”). As of December 31, 2014, our total debt was $94.1 million, which was primarily

 

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comprised of $86.7 million, net of unamortized discount of $1.6 million, outstanding under our Prior Senior Secured Credit Facilities, $3.6 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 and capital leases totaling $1.0 million. In April 2015, we entered into a new credit agreement providing for (i) a $174.5 million term loan facility and (ii) a $25.0 million revolving credit facility (collectively, the “Senior Secured Credit Facilities”), and used borrowings thereunder to repay all amounts outstanding under the Prior Senior Secured Credit Facilities and to retain a certain amount for a distribution to our sponsor in connection with the closing of this offering. 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 the Senior Secured Credit Facilities 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.

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.

 

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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 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.

 

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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. We are also obligated to indemnify the Hancock JV for environmental liabilities with respect to the Southampton plant for events occurring prior to its contribution to the Hancock JV. 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.

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

 

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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. EPA 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

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.

Our sponsor, Enviva Holdings, owns and controls our general partner and appoints 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 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

 

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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 $39.3 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.

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 $0.4125 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

 

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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 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;

 

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    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 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.

 

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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.”

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

 

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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 58.0% of our common and subordinated units (or 51.7% 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 $10.37 per common unit.

The assumed initial public offering price of $20.00 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 $9.63 per common unit. Based on the assumed initial public offering price of $20.00 per common unit, unitholders will incur immediate and substantial dilution of $10.37 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 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

 

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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 58.0% 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 58.0% 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 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 11,905,138 common units and 11,905,138 subordinated units outstanding, which includes the 10,000,000 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 1,905,138 common units that are issued to our sponsor will be subject to

 

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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.

Under our new management services agreement with Enviva Management (the “New MSA”), we are obligated to reimburse Enviva Management for all direct or indirect costs and expenses incurred by, or chargeable to, Enviva Management in connection with its provision of services necessary for the operation of our business. If the New MSA were terminated without replacement, or our general partner or its affiliates provided services outside of the scope of the New MSA, our partnership agreement would require us 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 10,000,000 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.

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;

 

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    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.

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

 

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above) beginning with our fiscal year ending December 31, 2016. 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 approved 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.

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.

 

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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.

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

 

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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 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.

 

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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.”

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,

 

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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 58.0% 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 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 $185.5 million from this offering (based on an assumed initial offering price of $20.00 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 structuring fee and offering expenses, to (i) pay, together with borrowings of $85.9 million under our new term loan facility, a $144.5 million distribution to our sponsor related to its contribution of assets to us in connection with this offering, a portion of which is intended as a reimbursement of capital expenditures of our sponsor, (ii) repay $81.9 million of intercompany indebtedness related to the acquisition of our Cottondale plant and that we will assume in connection with our sponsor’s contribution of its interests in Enviva Pellets Cottondale, LLC and (iii) retain $45.0 million for general partnership purposes, including future acquisitions. We will not be required to pay additional cash consideration for such contributed assets. The indebtedness related to the acquisition of our Cottondale plant bears interest at a rate of 4.00% per annum and will mature in 2020.

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 1,500,000 additional common units in full, the additional net proceeds would be approximately $28.1 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 1,500,000 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 $20.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount and structuring fee and offering expenses payable by us, to increase or decrease, respectively, by approximately $9.4 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 $21.00 per common unit, would increase net proceeds to us from this offering by approximately $29.0 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.0 decrease in the assumed initial offering price to $19.00 per common unit, would decrease the net proceeds to us from this offering by approximately $27.1 million. Any increase or decrease in the net proceeds would change the amount of the distribution to our sponsor.

 

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CAPITALIZATION

The following table shows our capitalization as of December 31, 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 December 31, 2014  
     Actual      Pro Forma  
            (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 592       $ 60,602   
  

 

 

    

 

 

 

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

Prior Senior Secured Credit Facilities (1)

$ 86,718    $ —     

Senior Secured Credit Facilities (1)

  —        172,505   

Other long-term debt and capital lease obligations

  7,357      6,252   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

  94,075      178,757   

Partners’ capital:

Limited partners’ capital (2)

  271,495      —     

Common unitholders

  —        198,420   

Subordinated unitholders

  —        106,059   

Noncontrolling partners’ interests

  3,033      3,033   
  

 

 

    

 

 

 

Total partners’ capital

  274,528      307,512   
  

 

 

    

 

 

 

Total capitalization

$ 368,603    $ 486,269   
  

 

 

    

 

 

 

 

(1) The Prior Senior Secured Credit Facilities outstanding balance of $86.7 million, net of unamortized discount of $1.6 million. As of January 31, 2015, we had $94.3 million outstanding under the Prior Senior Secured Credit Facilities, consisting of $88.3 million on the term loan and $6.0 million on the revolver. In April 2015, we entered into a new credit facility in the aggregate principal amount of up to $174.5 million term loan facility and a $25.0 million revolving credit facility. The pro forma amount reflects $172.5 million of term borrowings (net of unamortized discount of $2.0 million) of which $82.2 million was used to repay all amounts outstanding under the Prior 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 58.0% 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 $20.00 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 December 31, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $229.2 million, or $9.63 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

$ 20.00   

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

$ 13.92   

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

  4.29   
  

 

 

    

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

  9.63   
     

 

 

 

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

$ 10.37   
     

 

 

 

 

(1) Determined by dividing the pro forma net tangible book value prior to the offering of $192.3 million by the sum of the number of units (1,905,138 common units and 11,905,138 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 (11,905,138 common units and 11,905,138 subordinated units) to be outstanding after the offering.
(3) Each $1.00 increase or decrease in the assumed public offering price of $20.00 per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $9.4 million, or approximately $0.39 per common unit, and dilution per common unit to investors in this offering by approximately $0.61 per common unit, after deducting the estimated underwriting discount and structuring fee 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 $21.00 per common unit, would result in a pro forma net tangible book value of approximately $258.2 million, or $10.41 per common unit, and dilution per common unit to investors in this offering would be $10.59 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 $19.00 per common unit, would result in an pro forma net tangible book value of approximately $202.1 million, or $8.86 per common unit, and dilution per common unit to investors in this offering would be $10.14 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)

     13,810,276         58.0   $ 107,428,902         34.9

Purchasers in the offering

     10,000,000         42.0   $ 200,000,000         65.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

  23,810,276      100.0 $ 307,428,902      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, Enviva Holdings will own 1,905,138 common units and 11,905,138 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 December 31, 2014 would have been approximately $107,428,902.
(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, 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 $0.4125 per unit ($1.65 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 new credit agreement, which will contain financial tests and covenants that we must satisfy. 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.

 

   

Under our new management services agreement with Enviva Management (the “New MSA”), we are obligated to reimburse Enviva Management for all direct or indirect costs and expenses incurred by, or

 

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chargeable to, Enviva Management in connection with its provision of services necessary for the operation of our business. If the New MSA were terminated without replacement, or our general partner or its affiliates provided services outside of the scope of the New MSA, our partnership agreement would require us 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 $0.4125 per unit for each whole quarter, or $1.65 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 $9.8 million per quarter, or $39.3 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

     10,000,000       $ 4,125,000       $ 16,500,000   

Common units held by Enviva Holdings

     1,905,138         785,869         3,143,478   

Subordinated units held by Enviva Holdings

     11,905,138         4,910,869         19,643,478   
  

 

 

    

 

 

    

 

 

 

Total

  23,810,276    $ 9,821,738    $ 39,286,956   
  

 

 

    

 

 

    

 

 

 

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 $0.4744 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 June 30, 2015, 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, 2014

If we had completed the transactions contemplated in this prospectus on January 1, 2014, our pro forma cash available for distribution for the year ended December 31, 2014 would have been a surplus of approximately $33.7 million. In the year ended December 31, 2014, we would have been able to pay the full minimum quarterly distribution on our common units but only 71.6% of the aggregate minimum quarterly distribution on our subordinated units. On a quarterly basis, we would have been able to pay only 100.0% and 40.5% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended March 31, 2014, 100.0% of the minimum quarterly distribution on our common units and subordinated units during the quarter ended June 30, 2014, only 100.0% and 52.7% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended September 30, 2014, and only 48.9% and 0% of the minimum quarterly distribution on our common units and subordinated units, respectively, during the quarter ended December 31, 2014.

Our pro forma cash available for distribution is based on our historical consolidated results and on our pro forma combined 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 and pro forma combined 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 and Unaudited Pro Forma 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 and the unaudited pro forma condensed combined financial statements of Enviva Partners, LP and the notes to those combined 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, 2014, 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, 2014. 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,
2014
 
     March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
   
     (in thousands, except per unit amount)  

Revenues

          

Product sales

   $ 103,935      $ 101,647      $ 107,395      $ 116,361      $ 429,338   

Other revenue

     837        1,323        971        810        3,941   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     104,772        102,970        108,366        117,171        433,279   

Cost of goods sold, excluding depreciation and amortization

     89,663        86,868        89,785        97,727        364,043   

Depreciation and amortization

     7,476        6,167        6,208        6,094        25,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     97,139        93,035        95,993        103,821        389,988   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     7,633        9,935        12,373        13,350        43,291   

General and administrative expenses

     2,940        3,211        3,058        4,975        14,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     4,693        6,724        9,315        8,375        29,107   

Interest expense, net (2)

     (2,736     (2,800     (2,671     (2,731     (10,938

Early retirement of debt obligation

     (7,248     —          —          —          (7,248

Other income

     138        137        40        84        399   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (9,846     (2,663     (2,631     (2,647     (17,787
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5,153     4,061        6,684        5,728        11,320   

Adjustments to reconcile net income (loss) to adjusted EBITDA:

          

Add:

          

Depreciation and amortization

     7,497        6,190        6,246        6,140        26,073   

Interest expense, net (2)

     2,736        2,800        2,671        2,731        10,938   

Non-cash equity compensation

     1        —          1        —          2   

Early retirement of debt obligation

     7,248        —          —          —          7,248   

Income tax expense

     4        4        4        3        15   

Asset impairments and disposals

     20        1        (26     355        350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (3)

     12,353        13,056        15,580        14,957        55,946   

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

          

Less:

          

Cash interest expense (2)

     2,393        2,391        2,376        2,367        9,527   

Changes in operating assets and liabilities

     —          —          6,065        4,144        10,209   

Principal payments on debt

     1,262        21,331        15,192        16,362        54,147   

Expansion capital expenditures (5)

     2,509        2,426        905        1,167        7,007   

Incremental general and administrative expenses (6)

     500        500        500        500        2,000   

Add:

          

Changes in operating assets and liabilities

     1,185        10,475        —          —          11,660   

Borrowings under revolving line of credit

     —          20,000        17,000        12,000        49,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma cash available for distribution

   $ 6,874      $ 16,883      $ 7,542      $ 2,417      $ 33,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum quarterly and annual distributions:

          

Minimum quarterly and annual distributions per unit

   $ 0.4125      $ 0.4125      $ 0.4125      $ 0.4125      $ 1.65   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to public common unitholders

   $ 4,125      $ 4,125      $ 4,125      $ 4,125      $ 16,500   

Distributions to Enviva Holdings, LP - common units

     786        786        786        785        3,143   

Distributions to Enviva Holdings, LP - subordinated units

     4,911        4,911        4,911        4,910        19,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

   $ 9,822      $ 9,822      $ 9,822      $ 9,820      $ 39,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (2,948   $ 7,061      $ (2,280   $ (7,403   $ (5,570

 

(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 new senior secured credit facilities. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our new 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 new senior secured credit facilities.

 

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(5) Reflects pro forma 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.
(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 March 31, 2016

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 March 31, 2016, based on assumptions we believe to be reasonable. These assumptions include adjustments giving effect to this offering and the Transactions described under “Summary—The Transactions” as if they occurred on April 1, 2015.

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 March 31, 2016. 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 March 31, 2016 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 March 31, 2016 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 March 31, 2016, 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 March 31, 2016. 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 March 31, 2016. 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.

We are providing the estimated cash available for distribution and related assumptions for the twelve months ending March 31, 2016 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

 

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outstanding common and subordinated units for the twelve-month period ending March 31, 2016 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 March 31, 2016 with the unaudited pro forma cash available for distribution for the year ended December 31, 2014 presented under “—Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 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 March 31, 2016 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

March 31,
2016
 
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
   
   

(in thousands, except per unit amount)

 

Product sales

  $ 114,857      $ 102,991      $ 116,122      $ 117,721      $ 451,691   

Other revenue

    2,568        1,979        2,491        1,159        8,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

  117,425      104,970      118,613      118,880      459,888   

Cost of goods sold, excluding depreciation and amortization

  99,374      86,422      101,013      101,204      388,013   

Depreciation and amortization

  6,081      5,903      6,268      5,011      23,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

  105,455      92,325      107,281      106,215      411,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

$ 11,970    $ 12,645    $ 11,332    $ 12,665    $ 48,612   

General and administrative expenses (1)

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

Other income (expense):

Interest expense

  2,754      2,743      2,732      2,721      10,950   

Early retirement of debt obligation

  4,722      —        —        —        4,722   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 1,468    $ 7,157    $ 5,855    $ 6,918    $ 21,398   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to adjusted EBITDA:

Depreciation and amortization expense

$ 6,091    $ 5,913    $ 6,278    $ 5,021    $ 23,303   

Interest expense

  2,754      2,743      2,732      2,721      10,950   

Non-cash equity compensation

  125      125      125      125      500   

Early retirement of debt obligation

  4,722      —        —        —        4,722   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated adjusted EBITDA (2)

$ 15,160    $ 15,938    $ 14,990    $ 14,785    $ 60,873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Less:

Maintenance capital expenditures

  750      750      750      750      3,000   

Cash interest expense

  2,401      2,390      2,378      2,367      9,536   

Principal payments on debt

  819      778      779      781      3,157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated cash available for distribution

$ 11,191    $ 12,021    $ 11,082    $ 10,886    $ 45,180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum quarterly and annual distributions:

Minimum quarterly and annual distributions per unit

$ 0.4125    $ 0.4125    $ 0.4125    $ 0.4125    $ 1.6500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to public common unitholders

$ 4,125    $ 4,125    $ 4,125    $ 4,125    $ 16,500   

Distributions to Enviva Holdings, LP - common units

  786      786      786      785      3,143   

Distributions to Enviva Holdings, LP - subordinated units

  4,911      4,911      4,911      4,910      19,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

$ 9,822    $ 9,822    $ 9,822    $ 9,820    $ 39,286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of estimated cash available for distribution over aggregate distributions

$ 1,369    $ 2,199    $ 1,260    $ 1,066    $ 5,894   

 

(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 March 31, 2016 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 March 31, 2016 will not be less than approximately $45.2 million. This amount of estimated cash available for distribution is approximately $11.5 million more than the pro forma cash available for distribution we generated for the year ended December 31, 2014.

Sales Volume. Our product sales volume for the twelve months ending March 31, 2016 is projected to be approximately 2.4 million metric tons as compared to our pro forma product sales volume of approximately 2.2 million metric tons for the pro forma year ended December 31, 2014. The increased sales volumes are due to a greater number of expected shipments during the forecast period as compared to the pro forma year ended December 31, 2014. The incremental shipments consist of a greater volume of deliveries under our existing off-take contracts as well as a contracted delivery to a new customer during the forecast period. 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 102,000 metric tons as compared to the pro forma year ended December 31, 2014. The remainder of the increase is driven by an expected increase in volumes during the forecast period, as a result of volumes to be procured from the Hancock JV under the Biomass Purchase Agreement described under “Certain Relationships and Related Transactions—Other Transactions with Related Persons—Biomass Purchase and Terminal Services Agreements.”

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 March 31, 2016 is projected to be $459.9 million, compared to $433.3 million for the pro forma year ended December 31, 2014. The revenue increase is expected to be primarily the result of a greater number of shipments during the forecast period supported by an increase in our plant production volumes and volumes procured from the Hancock JV.

Cost of Goods Sold, excluding Depreciation and Amortization. Cost of goods sold excluding depreciation and amortization is projected to increase to $388.0 million for the twelve months ending March 31, 2016, compared to $364.0 million for the pro forma year ended December 31, 2014. The increase is expected to be predominantly due to increased product sales as noted above. On a per unit basis, costs will decrease as compared to the pro forma year ended December 31, 2014, 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 March 31, 2016 is projected to be $23.3 million, compared to $26.0 million for the pro forma year ended December 31, 2014. The decrease in depreciation and amortization compared to the year ended December 31, 2014 is driven by the amortization of intangible assets related to customer contracts.

General and Administrative Expenses. General and administrative expenses are projected at $11.5 million for the twelve months ending March 31, 2016, compared to $14.2 million for the pro forma year ended December 31,

 

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2014. The decrease is a function of cost synergies expected from the acquisition of Green Circle in January 2015. Green Circle incurred $3.3 million of general and administrative expenses during the pro forma year ended December 31, 2014, the majority of which is not expected to impact the forecast period.

Interest. Interest expense and cash interest expense are a function of outstanding indebtedness, principally from borrowings under our Senior Secured Credit Facilities. The credit facility includes $174.5 million of term borrowings and $25.0 million available for borrowings under a revolving line of credit. The term of the facility is five years and borrowings bear interest, at our option, at either (i) base rate plus an applicable margin ranging from 2.80% to 3.25% or (ii) LIBOR (with a 1.00% floor for term loan borrowings) plus an applicable margin ranging from 3.80% to 4.25%. For the purpose of our forecast for the twelve months ending March 31, 2016, we assumed that we borrowed $99.5 million under Tranche A-1 of the term loan facility, bearing interest at 5.10%, and $75.0 million under Tranche A-2, bearing interest at 5.25%.

Regulatory, Industry and Economic Factors. Our forecast of results of operations for the twelve months ending March 31, 2016 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 March 31, 2016.

 

    There will not be any material adverse changes affecting our operations or those of our customers during the twelve months ending March 31, 2016.

 

    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 March 31, 2016.

 

    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 June 30, 2015, we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.4125 per unit, or $1.65 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 June 30, 2015.

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:

 

    $39.3 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; plus

 

    an amount equal to the net proceeds from this offering and borrowings prior to this offering that are retained for general partnership purposes, up to the amount of accounts receivable distributed to our sponsor prior to the closing of this offering; 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 $39.3 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); or

 

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

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 $0.4125 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 March 31, 2018, 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 June 30, 2015, 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 March 31, 2016, if each of the following has occurred:

 

    distributions from operating surplus exceeded $2.475 (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 $2.475 (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; 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 $0.4744 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 $0.5156 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 $0.6188 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 $0.4125      100.0     0

First Target Distribution

   above $0.4125 up to $0.4744      100.0     0

Second Target Distribution

   above $0.4744 up to $0.5156      85.0     15.0

Third Target Distribution

   above $0.5156 up to $0.6188      75.0     25.0

Thereafter

   above $0.6188      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 $0.65.

 

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

Minimum Quarterly Distribution

  up to $0.4125     100.0     0.0     up to $0.6500 (1)   

First Target Distribution

  above $0.4125 up to $0.4744     100.0     0.0     above $0.6500 up to $0.7475 (2)   

Second Target Distribution

  above $0.4744 up to $0.5156     85.0     15.0     above $0.7475 up to $0.8125 (3)   

Third Target Distribution

  above $0.5156 up to $0.6188     75.0     25.0     above $0.8125 up to $0.9750 (4)   

Thereafter

  above $0.6188     50.0     50.0     above $0.9750   

 

(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 23,810,276 common units outstanding and the distribution to each common unit would be $0.65 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 $0.4125   $ 9,821,739      $ —        $ 9,821,739   

First Target Distribution

  above $0.4125 up to $0.4744     1,473,856        —          1,473,856   

Second Target Distribution

  above $0.4744 up to $0.5156     980,983        173,115        1,154,098   

Third Target Distribution

  above $0.5156 up to $0.6188     2,457,220        819,073        3,276,294   

Thereafter

  above $0.6188     742,881        742,881        1,485,761   
   

 

 

   

 

 

   

 

 

 
$ 15,476,679    $ 1,735,069    $ 17,211,748   
   

 

 

   

 

 

   

 

 

 

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 26,479,613 common units outstanding and the distribution to each common unit would be $0.65. 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

 

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rights for the quarter prior to the reset as shown in the table above, or $1,735,069, by (2) the cash distributed on each common unit for the quarter prior to the reset as shown in the table above, or $0.65.

 

   

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 $0.6500   $ 15,476,679      $ 1,735,069      $ —        $ 1,735,069      $ 17,211,748   

First Target Distribution

  above $0.6500 up to $0.7475     —          —          —          —          —     

Second Target Distribution

  above $0.7475 up to $0.8125     —          —          —          —          —     

Third Target Distribution

  above $0.8125 up to $0.9750     —          —          —          —          —     

Thereafter

  above $0.9750     —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 15,476,679    $ 1,735,069    $ —      $ 1,735,069    $ 17,211,748   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

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.

 

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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 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.

 

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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;

 

    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

 

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    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, which is owned by Enviva Wilmington Holdings, LLC, a joint venture between a wholly-owned subsidiary of Enviva Holdings, LP, Hancock Natural Resource Group, Inc. and certain other affiliates of John Hancock Life Insurance Company) were transferred by Enviva MLP Holdco, LLC to Enviva Partners, LP prior to this offering in April 2015. 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 and summary pro forma combined financial data of Enviva Partners, LP 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, 2014 and 2013 are derived from the audited historical consolidated financial statements of Enviva Partners, LP Predecessor that are included elsewhere in this prospectus.

The selected pro forma combined financial and operating data presents unaudited pro forma balance sheet data as of December 31, 2014, and statement of operations and other financial and operating data for the year ended December 31, 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 December 31, 2014, in the case of the pro forma balance sheet, and on January 1, 2014, in the case of the pro forma statement of operations for the year ended December 31, 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
    Year Ended
December 31,
     2014     
 
          2014               2013         
           (unaudited)  
     (in thousands, except per metric ton and
operating data)
 

Statement of Operations Data:

      

Product sales

   $  286,641      $ 176,051      $ 429,338   

Other revenue

     3,495        3,836        3,941   
  

 

 

   

 

 

   

 

 

 

Net revenue

  290,136      179,887      433,279   

Costs of goods sold, excluding depreciation and amortization

  251,058      152,720      364,043   

Depreciation and amortization (1)

  18,971      11,827      25,945   
  

 

 

   

 

 

   

 

 

 

Total cost of goods sold

  270,029      164,547      389,988   
  

 

 

   

 

 

   

 

 

 

Gross margin

  20,107      15,340      43,291   

General and administrative expenses

  11,132      16,373      14,184   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  8,975      (1,033   29,107   

Other income (expense):

Interest expense

  (8,724   (5,460   (10,938

Early retirement of debt obligation

  (73        (7,248

Other income

  7      996      399   
  

 

 

   

 

 

   

 

 

 

Total other expense, net

  (8,790   (4,464   (17,787
  

 

 

   

 

 

   

 

 

 

Net income (loss)

  185      (5,497   11,320   

Less loss attributable to noncontrolling partners’ interests

  79      58      79   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Enviva Partners, LP

$ 264    $ (5,439 $ 11,399   
  

 

 

   

 

 

   

 

 

 

Pro forma net income per limited partner unit:

Common unit

$ 0.48   
      

 

 

 

Subordinated unit

$ 0.48   
      

 

 

 

Statement of Cash Flow Data:

Net cash provided by (used in):

Operating activities

$ 29,434    $ (7,557

Investing activities

  (14,664   (115,799

Financing activities

  (17,736   115,235   

Other Financial Data:

Adjusted EBITDA (2)

$ 28,348    $ 12,101    $ 55,946   

Adjusted gross margin per metric ton (2)

$ 25.91    $ 29.18   

Expansion capital expenditures (3)

  14,733      124,732   

Operating Data:

Total metric tons sold

  1,508      931   

Balance Sheet Data (at period end):

Cash and cash equivalents

$ 592    $ 3,558    $ 60,602   

Total assets

  384,489      400,003      505,571   

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

  94,075      100,524      178,757   

Total liabilities

  109,961      128,592      198,059   

Partners’ capital

  274,528      271,411      307,512   

 

(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 net income or loss 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 net income or loss. Our non-GAAP financial measure of adjusted EBITDA should not be considered as an alternative to GAAP net income or loss. 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,     Year Ended
December 31,

        2014        
 
             2014                      2013            
           (unaudited)  
     (in thousands)  

Reconciliation of adjusted EBITDA to net income (loss):

       

Net income (loss)

   $ 185       $ (5,497   $ 11,320   

Depreciation and amortization

     19,009         11,887        26,073   

Interest expense

     8,724         5,460        10,938   

Early retirement of debt obligation

     73         —          7,248   

Non-cash equity compensation

     2         5        2   

Income tax expense

     15         23        15   

Asset impairments and disposals

     340         223        350   
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

$ 28,348    $ 12,101    $ 55,946   
  

 

 

    

 

 

   

 

 

 

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.

 

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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 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,      Year Ended
December 31,

     2014     
 
          2014                2013          
                   (unaudited)  
     (in thousands, except per metric ton)  

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

        

Metric tons sold

     1,508         931      

Gross margin

   $ 20,107       $ 15,340       $ 43,291   

Depreciation and amortization (1)

     18,971         11,827         25,945   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin

$ 39,078    $ 27,167    $ 69,236   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin per metric ton

$ 25.91    $ 29.18   

 

(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, 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, please read 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 contributed some but not all of its assets and liabilities to us in April 2015. 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 included elsewhere in this prospectus. In addition, the historical financial results discussed below do not include the results of Enviva Pellets Cottondale, LLC, which was acquired by our sponsor in January 2015. 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”). 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 through 2016 to deliver wood pellet quantities approximately equal to all of the production capacity of our production plants plus the wood pellets we will purchase from Enviva Wilmington Holdings, LLC, a joint venture between a wholly-owned subsidiary of Enviva Holdings, LP, Hancock Natural Resources Group, Inc. and certain other affiliates of John Hancock Life Insurance Company (the “Hancock JV”). 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 2.3 million MT of wood pellets in 2015 and have a weighted average remaining term of 5.7 years from January 1, 2015. We intend to expand our business by taking advantage of the growing demand for our products 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. We define adjusted EBITDA as net income or loss 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 and research analysts, 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, please read “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 to the other periods presented, principally for the following reasons:

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 consolidated financial statements for the year ended December 31, 2013 include eight months of revenue and operating costs, whereas the year ended December 31, 2014 includes twelve months of revenue and operating costs. 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 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

 

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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 contracted 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 impact on gross margin. We were responsible for the shipping costs on all shipments to our customers during the years ended December 31, 2014 and 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 a series of transactions in November 2012, which we collectively refer to as the “Reorganization,” whereby our predecessor distributed to our sponsor certain of its subsidiaries that were engaged in operations other than the production and supply of utility-grade wood pellets, entities whose results are not reflected within our historical consolidated financial statements conduct such development 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 year ended December 31, 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.

Our sponsor provided corporate management and administrative services on our behalf through a Management Services Agreement (“MSA”), which was terminated in April 2015. We incurred general and administrative costs related to the MSA with our sponsor that covered the corporate salary and overhead expenses associated with our business. 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 could be charged to us by our sponsor under the MSA for both the annual fee and the expense reimbursement increased 2% each year. In any year of the agreement, our sponsor had the choice to charge less than the maximum. Direct and indirect costs and expenses were either directly identifiable or allocated to us by our sponsor. The general method used to allocate direct and indirect costs and expenses was established through the annual budgeting process. Our sponsor estimated 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 allocated to us the actual costs accumulated in the financial system based on the estimated budgeted percentage for each type of cost. We were charged for any directly identifiable costs such as goods or services provided to us at our request. We believe the

 

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assumptions and allocation were made on a reasonable basis and were the best estimate of the costs which we would have incurred on a stand-alone basis. To the extent the fees allocable exceeded the maximum, the additional costs were recorded with an increase to capital. For the years ended December 31, 2014 and 2013, we incurred $9.3 million and $8.0 million, respectively, of expense pursuant to the MSA. Effective April 2015, all of our employees and management became employed by Enviva Management, and we and our general partner entered into a management services agreement with Enviva Management. For more information, please read “Certain Relationships and Related Transactions—Other Transactions with Related Persons—New Management Services Agreement.” The MSA automatically terminated upon the execution of the new management services agreement.

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, on an annual basis, 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 for the periods presented we have 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.

The majority of the wood pellets we supply to our customers are produced at our production plants. We also fulfill our contractual commitments and take advantage of dislocation in market supply and demand by purchasing shipments from third parties and reselling them in back-to-back transactions. In transactions where title and risk of loss is immediately transferred to the ultimate purchaser, revenue is recorded net of costs paid to the third-party supplier. This revenue is included in “Other revenue.”

In some instances, a customer may request to cancel, defer or accelerate a shipment. Contractually, we will seek to optimize our position by selling or purchasing the subject shipment to or from another party, either within

 

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our contracted off-take portfolio or as an independent transaction on the spot market. The original customer pays us a fee including reimbursement of any incremental costs, which is included in revenue.

Contracted Backlog

We have entered into off-take contracts with annual delivery requirements that approximate our estimated available production capacity. As of December 31, 2014, we had approximately $1.7 billion of product sales backlog for firm contracted product sales to Drax, GDF and E.ON. Backlog represents the revenue to be recognized under existing contracts assuming deliveries occur as specified in the contract.

Our predecessor’s expected future product sales revenue under our contracted backlog as of December 31, 2014 is as follows (in millions):

 

Year ending December 31, 2015

$ 311   

Year ending December 31, 2016

  279   

Year ending December 31, 2017 and thereafter

  1,094   
  

 

 

 

Total product sales contracted backlog

$ 1,684   
  

 

 

 

Costs of Conducting Our Business

Cost of Goods Sold

Cost of goods sold includes the costs to produce and deliver our wood pellets to customers. The principal expenses to produce and deliver our wood pellets consist of raw material, production and distribution costs.

We have strategically located our plants in the Southeastern U.S., a region with plentiful wood fiber resources. We manage the supply of raw materials into our plants through a mixture of short-term and long-term contracts. Delivered wood fiber costs include stumpage (i.e., the price paid to the underlying timber resource owner for the raw material) as well as harvesting, transportation and, in some cases, reduction services provided by our suppliers. The majority of our product volumes are sold under contracts that include cost pass-through mechanisms to mitigate increases in raw material and distribution costs.

Production costs at our production plants consist of labor, energy, tooling, repairs and maintenance and plant overhead costs. Our off-take contracts include price escalators that mitigate inflationary pressure on certain components of our production costs. In addition to the wood pellets that we produce at our owned and operated production plants, we selectively purchase additional quantities of wood pellets from third-party wood pellet producers. Production costs also include depreciation expense associated with the use of our plants and equipment that increases as assets are placed into service.

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

Additionally, we amortize the purchase price of an acquired customer contract that was recorded as an intangible as deliveries are made during the contract term.

Raw material, production and distribution costs associated with delivering our wood pellets to our ports and third-party pellet purchase costs are capitalized as a component of inventory. Fixed production overhead,

 

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including the related depreciation expense, is allocated to inventory based on the normal capacity of the facilities. These costs are reflected in cost of goods sold when inventory is sold. During the ramp-up period when production volume is often below the expected plant capacity, we charge such under-absorption of fixed overhead to expense. Distribution costs associated with shipping our wood pellets to our customers and amortization are expensed as incurred.

General and Administrative Expenses

We incurred general and administrative costs related to the MSA with our sponsor covering corporate salary and overhead expenses associated with our business. Under the MSA, prior to 2014, we paid an annual fee of up to $7.2 million to our sponsor and reimbursed up to $3.0 million of direct and indirect expenses incurred by our sponsor on our behalf. Beginning in 2014, the then-effective maximum amount that could be charged to us by our sponsor under the MSA for both the annual fee and the expense reimbursement increased 2% each year. To the extent the fees allocable exceeded the maximum, the additional costs were recorded with an increase to contributed capital. Effective April 2015, all of our employees and management became employed by Enviva Management, and we and our general partner entered into a management services agreement with Enviva Management. For more information, please read “Certain Relationships and Related Transactions—Other Transactions with Related Persons—New Management Services Agreement.” The MSA automatically terminated upon the execution of the new management services agreement.

During 2013, we incurred general and administrative costs related to plant development activities. We do not expect to incur any further general and administrative expenses related to plant development activities, which include startup and commissioning activities at our plants prior to beginning production as well as incremental overhead costs related to our construction activities. These costs will be incurred by entities whose results are not reflected within our consolidated financial statements.

 

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Results of Operations

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

     Year Ended December 31,      Change  
           2014                  2013           
     (in thousands)  

Product sales

   $ 286,641       $ 176,051       $ 110,590   

Other revenue

     3,495         3,836         (341
  

 

 

    

 

 

    

 

 

 

Net revenue

  290,136      179,887      110,249   

Costs of goods sold, excluding depreciation and amortization

  251,058      152,720      98,338   

Depreciation and amortization(1)

  18,971      11,827      7,144   
  

 

 

    

 

 

    

 

 

 

Total cost of goods sold

  270,029      164,547      105,482   
  

 

 

    

 

 

    

 

 

 

Gross margin

  20,107      15,340      4,767   

General and administrative expenses

  11,132      16,373      (5,241
  

 

 

    

 

 

    

 

 

 

Income (loss) from operations

  8,975      (1,033   10,008   

Interest expense

  (8,724   (5,460   3,264   

Early retirement of debt obligation

  (73   —        73   

Other income

  7      996      (989
  

 

 

    

 

 

    

 

 

 

Net income (loss)

  185      (5,497   5,682   

Less loss attributable to noncontrolling partners’ interests

  79      58      21   
  

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Enviva, LP

$ 264    $ (5,439 $ 5,703   
  

 

 

    

 

 

    

 

 

 

 

  (1) Excludes depreciation of office furniture and equipment of $37 and $60 for the years ended December 31, 2014 and 2013, respectively. Such amount is included in general and administrative expenses.

Net revenue

Net revenue was $290.1 million and $179.9 million for the years ended December 31, 2014 and 2013, respectively, and was comprised of product sales and other revenue, which are discussed below.

Product sales

Revenue related to product sales (either produced by us or procured from a third party) increased $110.6 million from $176.1 million for the year ended December 31, 2013 to $286.6 million for the year ended December 31, 2014. This increase was due to increased volumes of wood pellet sales driven by two new off-take contracts that were supplied by increased production volumes primarily from the Northampton and Southampton plants.

Other revenue

Other revenue decreased to $3.5 million for the year ended December 31, 2014 from $3.8 million for the year ended December 31, 2013. Other revenue is primarily comprised of terminal services, professional and exclusivity fees and product sales for which we were deemed to be an agent of the purchaser. In these agency related transactions, we do not bear the risk of loss or take title to the wood pellets purchased from a third party.

 

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Costs of goods sold

Costs of goods sold increased to $270.0 million for the year ended December 31, 2014 from $164.5 million for the year ended December 31, 2013. The $105.5 million increase was primarily due to increased wood pellet sales volumes during 2014 compared to 2013. Cost of goods sold included depreciation and amortization expenses of $19.0 million and $11.8 million for the years ended December 31, 2014 and 2013, respectively. Cost of goods sold was also higher during 2014 because, in 2013, there were only eight months of depreciation expense related to the Northampton plant and two months of depreciation expense related to the Southampton plant, as both plants were placed into service during 2013. The Chesapeake terminal’s storage capacity was also expanded during the year ended December 31, 2013.

Gross margin

We earned gross margin of $20.1 million and $15.3 million for the years ended December 31, 2014 and 2013, respectively. The gross margin increase of $4.8 million was primarily attributable to the following:

 

    For the year ended December 31, 2014, gross margin was increased by $16.5 million attributable to an increased volume of wood pellets sold as compared to 2013. Sales of wood pellets increased from 931,000 MT during the year ended December 31, 2013 to 1,508,000 MT during the year ended December 31, 2014, a 62% increase in volume.

 

    We experienced changes in customer mix during the year ended December 31, 2014 resulting in a higher percentage of sales under contracts with more favorable pricing terms for the year ended December 31, 2014 as compared to the year ended December 31, 2013. The increase in pricing contributed $2.1 million to gross margin during the year ended December 31, 2014.

 

    Offsetting the above was a gross margin decrease of $6.6 million in 2014 due to higher costs of delivered wood fiber and increased production costs as compared to 2013. In our Mid-Atlantic region, we purchased approximately 1,394,000 MT of wood fiber during the year ended December 31, 2013 compared to 2,378,000 MT during the year ended December 31, 2014, a 71% increase in volume. Constraints on hardwood logging capacity in the region during the first quarter of 2014 as our plants completed their ramp-up periods contributed to higher raw material costs. Operational challenges, exacerbated by extreme cold temperatures and excessive precipitation during the first quarter of 2014, reduced plant utilization, particularly impacting the Southampton plant which was still in the initial months of its ramp-up period. Although our operations in the Southeastern United States generally experience some seasonality, these abnormal weather conditions also negatively impacted volumes and pricing of raw materials available within the immediate location of our plants as the sustained wet logging conditions required our suppliers to move further westward to more favorable conditions, increasing our inbound logistics costs included in the cost of delivered wood fiber as compared to 2013. The continuation of the ramping-up of the Southampton plant and increased repair and maintenance costs also contributed to the unfavorable cost position as compared to 2013.

 

    A $7.1 million increase in depreciation expense further reduced gross margin for the year ended December 31, 2014 compared the year ended December 31, 2013. The consolidated financial statements for the year ended December 31, 2013 include only eight months of depreciation expense related to the Northampton plant and two months of depreciation expense related to the Southampton plant. The Chesapeake terminal storage expansion also occurred during 2013.

 

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Adjusted gross margin per metric ton

 

     Year Ended December 31,      Change  
     2014      2013     
     (in thousands except per metric ton)  

Metric tons sold

     1,508         931         577   

Gross margin

   $ 20,107       $ 15,340       $ 4,767   

Depreciation and amortization(1)

     18,971         11,827         7,144   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin

$ 39,078    $ 27,167    $ 11,911   
  

 

 

    

 

 

    

 

 

 

Adjusted gross margin per metric ton

$ 25.91    $ 29.18    $ (3.27

 

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

We earned an adjusted gross margin of $39.1 million, or $25.91 per metric ton, for the year ended December 31, 2014 and an adjusted gross margin of $27.2 million, or $29.18 per metric ton, for the year ended December 31, 2013. The factors impacting adjusted gross margin per metric ton are detailed above under the heading “Gross margin.”

General and administrative expenses

General and administrative expenses were $11.1 million for the year ended December 31, 2014 and $16.4 million for the year ended December 31, 2013. For the year ended December 31, 2014, general and administrative expenses included allocated and direct expenses of $9.3 million that were incurred under the MSA. For the year ended December 31, 2014, we also recorded $0.9 million of expenses paid by our sponsor. General and administrative costs for the year ended December 31, 2013 included $8.0 million of charges under the MSA. In 2013, we also incurred $6.3 million of expenses related to plant startup and commissioning activities at the Northampton and Southampton plants as well as overhead costs associated with the construction activities. We do not expect to incur any further general and administrative expenses related to plant development activities. These expenses, which include startup and commissioning activities at our plants prior to beginning production as well as incremental overhead costs related to our construction activities, are incurred by entities whose results are not reflected within our consolidated financial statements.

 

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Interest expense

We incurred $8.7 million of interest expense during the year ended December 31, 2014, and $5.5 million during the year ended December 31, 2013. The increase in interest expense was attributable to an increase in our long-term debt outstanding and a decrease in capitalized interest as our new plants and assets related to the terminal storage expansion facility were placed in service. Please read “—Prior Senior Secured Credit Facilities” below.

Adjusted EBITDA

 

     Year Ended December 31,  
     2014      2013      Change  
     (in thousands)  

Reconciliation of adjusted EBITDA to net income (loss):

        

Net income (loss)

   $ 185       $ (5,497    $ 5,682   

Depreciation and amortization

     19,009         11,887         7,122   

Interest expense

     8,724         5,460         3,264   

Early retirement of debt obligation

     73         —           73   

Non-cash equity compensation

     2         5         (3

Income tax expense

     15         23         (8

Asset impairments and disposals

     340         223         117   
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

$ 28,348    $ 12,101    $ 16,247   
  

 

 

    

 

 

    

 

 

 

We generated adjusted EBITDA of $28.3 million for the year ended December 31, 2014 compared to $12.1 million for the year ended December 31, 2013. The $16.2 million improvement in adjusted EBITDA was primarily attributable to the $11.9 million increase in adjusted gross margin discussed in further detail above. Also contributing to the adjusted EBITDA was the $5.2 million reduction in general and administrative expenses discussed above under the heading “General and Administrative Expenses.”

Liquidity and Capital Resources

Overview

Our predecessor’s principal liquidity requirements for the years ended December 31, 2014 and 2013 were to fund capital expenditures for the construction of the Northampton and Southampton plants, to expand the storage capacity at our Chesapeake terminal and to meet working capital needs. Our predecessor met its liquidity needs with a combination of funds generated through operations, proceeds from long-term indebtedness and equity contributions from our sponsor.

We expect our sources of liquidity to include cash generated from operations, borrowings under our Senior Secured Credit Facilities and, from time to time, debt and equity offerings. We operate in a capital-intensive industry, and our primary liquidity needs are to fund working capital, service our debt, maintain cash reserves, finance maintenance capital expenditures and pay distributions. We believe cash generated from our operations will be sufficient to meet the short-term working capital requirements of our business. However, future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. We intend to pay at least the minimum quarterly distribution of $0.4125 per common and subordinated unit per quarter, which equates to $9.8 million per quarter, or $39.3 million per year, based on the number of common and subordinated units to be outstanding after completion of this offering, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses. Because it is our intent to distribute at least the minimum quarterly distribution on all of our units on a quarterly

 

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basis, we expect that we will rely upon external financing sources, including bank borrowings, and the issuance of debt and equity securities, to fund future acquisitions.

Working Capital

Working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. Our working capital was $33.2 million at December 31, 2014 and $24.1 million at December 31, 2013. The primary components of changes in working capital were the following:

Accounts receivable, net

Accounts receivable, net decreased by $4.2 million during the year ended December 31, 2014 as compared to December 31, 2013, primarily due to the timing, volume and size of product shipments.

Inventories

Our inventories consist of raw materials, work-in-process, consumable tooling and finished goods. Inventories decreased to $18.1 million at December 31, 2014 from $19.1 million at December 31, 2013. The $1.0 million decrease was primarily attributable to a decrease in finished goods related to the timing of product shipments from our port locations.

Restricted cash

Restricted cash consists primarily of a restricted debt service reserve account in connection with our Prior Senior Secured Credit Facilities. We are required to fund the account in an amount equal to scheduled principal and interest payments during the subsequent nine month period. We increased the debt service reserve account from $3.0 million at December 31, 2013 to $11.6 million at December 31, 2014.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities included $10.6 million of capital-related items at December 31, 2013, primarily related to the construction of the Southampton plant. Accounts payable and accrued liabilities included only $0.8 million of capital-related items at December 31, 2014 as construction activities at the Southampton plant were mostly completed. Accounts payable and accrued liabilities at December 31, 2014 also included $2.4 million related to the MSA.

Cash Flows

The following table sets forth a summary of our net cash flows from operating, investing and financing activities for the years ended December 31, 2014 and 2013:

 

     Year Ended December 31,  
     2014     2013  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ 29,434      $ (7,577

Net cash used in investing activities

     (14,664     (115,799

Net cash (used in) provided by financing activities

     (17,736     115,235   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

$ (2,966 $ (8,141
  

 

 

   

 

 

 

 

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Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was $29.4 million for the year ended December 31, 2014 compared to net cash used of $7.6 million for the year ended December 31, 2013. The improvement of $37.0 million was primarily attributable to the following:

 

    A decrease in net loss, excluding depreciation and amortization, of $12.8 million during the year ended December 31, 2014 as compared to the year ended December 31, 2013. The improvement in the net loss was attributable to the factors detailed above under “—Results of Operations.”

 

    The increase in cash flows from operating activities was also impacted by a favorable change in operating assets and liabilities of $22.0 million during the year ended December 31, 2014 compared to the corresponding period in 2013. This increase was primarily attributable to a decrease in inventories and accounts receivable during the year ended December 31, 2014 as compared to the year ended December 31, 2013, which was primarily due to the timing and size of product shipments and an increase in accounts payable and accrued expenses, including a $2.4 million payable related to the MSA at December 31, 2014.

Cash Used in Investing Activities

Net cash used in investing activities decreased by $101.1 million for the year ended December 31, 2014 as compared to the corresponding period in 2013. The decrease during the year ended December 31, 2014 related primarily to a decrease in purchases of property, plant and equipment driven by completing the construction of the Northampton and Southampton plants and the Chesapeake terminal storage expansion during 2013.

Cash (Used in) Provided by Financing Activities

Net cash provided by financing activities decreased by $133.0 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013. We received no cash contributions from our sponsor or net proceeds under the Prior Senior Secured Credit Facilities for construction activities during the year ended December 31, 2014 as compared to $58.3 million and $60.0 million, respectively, during the year ended December 31, 2013. Also contributing to the decrease in cash was a $8.6 million increase in cash deposited into our restricted debt service reserve account and $6.7 million in principal payments under the term borrowings in connection with our Prior Senior Secured Credit Facilities.

Prior Senior Secured Credit Facilities

In November 2012, we entered into a Credit and Guaranty Agreement (the “Prior Credit Agreement”) providing for $120.0 million aggregate principal amount of senior secured credit facilities (the “Prior Senior Secured Credit Facilities”). The Prior Senior Secured Credit Facilities consisted of (i) $35.0 million aggregate principal amount of Tranche A advances, (ii) up to $60.0 million aggregate principal amount of delayed draw term commitments, (iii) up to $15.0 million aggregate principal amount of working capital commitments and (iv) up to $10.0 million aggregate principal amount of letter of credit facility commitments. We were required to use the proceeds from borrowings under the Tranche A facility and the delayed draw term facility to complete the construction of the Northampton and Southampton plants and to increase the storage capacity of our Chesapeake terminal. The obligations under the Prior Credit Agreement were guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets.

The Prior Credit Agreement contained certain covenants, restrictions and events of default including, but not limited to, limitations on our ability to (i) incur indebtedness, (ii) pay dividends or make other distributions, (iii) prepay, redeem or repurchase certain debt, (iv) make loans and investments, (v) sell assets, (vi) incur liens, (vii) enter into transactions with affiliates and (viii) consolidate or merge.

 

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We anticipated that we were unlikely to meet certain of the 2014 quarterly Leverage Ratio requirements (as described below) due to the aforementioned operational challenges, particularly at the Southampton plant, and the effect on production and costs from unusually extreme weather in the Southeastern United States during the first quarter of 2014. We entered into the First Amendment to the Prior Credit Agreement (the “Amendment”) on April 9, 2014. Under the terms of the Amendment, the Leverage Ratio requirements were modified for the four quarters ending in 2014.

Pursuant to the Prior Credit Agreement, we were required to maintain, as of the last day of the quarter ended December 31, 2013, a ratio of total debt to adjusted EBITDA (“Leverage Ratio”) of not more than 3.50:1.00. As amended on April 9, 2014, the Prior Credit Agreement required us to maintain, as of the last day of any fiscal quarter and until a repayment event occurred, a Leverage Ratio for the four previous quarters of not more than 4.75:1.00 for the quarter ending March 31, 2014, 4.25:1.00 for the quarter ending June 30, 2014, 3.50:1.00 for the quarter ending September 30, 2014, 3.00:1.00 for the quarter ending December 31, 2014, and 2.50:1.00 for the quarter ending March 31, 2015 and thereafter. In addition, we were required to maintain as of the last day of any fiscal quarter, beginning the fiscal quarter ending December 31, 2013, a ratio of adjusted EBITDA to interest expense (“Interest Coverage Ratio”) of not less than 3.50:1.00 for the four previous consecutive quarters.

The Prior Credit Agreement defined adjusted EBITDA as income or loss from continuing operations, excluding depreciation and amortization, interest expense, interest income, taxes, early retirement of debt obligation, non-cash equity compensation and asset impairments and disposals. For the quarter ending December 31, 2013, adjusted EBITDA and interest expense was deemed to equal adjusted EBITDA and interest expense for the quarter ending December 31, 2013 multiplied by four. For the quarter ending March 31, 2014, adjusted EBITDA and interest expense were deemed to equal adjusted EBITDA and interest expense for the first two quarters then ending multiplied by two. For the quarter ending June 30, 2014, adjusted EBITDA and interest expense were deemed to equal adjusted EBITDA and interest expense for the three quarters then ending multiplied by 4/3.

For the quarter ended December 31, 2014, our total debt to adjusted EBITDA was 2.95:1.00, which was less than the maximum ratio of 3.00:1.00, and our adjusted EBITDA to total interest expense was 3.94:1.00 which exceeded the minimum ratio of 3.50:1.00.

For more information about the Prior Senior Secured Credit Facilities, please read Note 8 to our audited financial statements included elsewhere in this prospectus. In April 2015, we refinanced and terminated the Prior Senior Secured Credit Facilities with term loan borrowings under our new Senior Secured Credit Facilities, as described below.

New Senior Secured Credit Facilities

In April 2015, we entered into a Credit Agreement (the “Credit Agreement”) providing for $199.5 million aggregate principal amount of senior secured credit facilities (the “Senior Secured Credit Facilities”). The Senior Secured Credit Facilities consist of (i) $99.5 million aggregate principal amount of Tranche A-1 advances, (ii) $75.0 million aggregate principal amount of Tranche A-2 advances and (iii) up to $25.0 million aggregate principal amount of revolving credit commitments. We are also able to request loans under incremental facilities under the Credit Agreement on terms and conditions and in the maximum aggregate principal amounts set forth therein, provided that such no lenders have commitments to make loans under such incremental facilities.

The Senior Secured Credit Facilities mature in April 2020. Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at either a base rate plus an applicable margin or at a Eurodollar rate (with a 1.00% floor for term loan borrowings) plus an applicable margin. The applicable margin is (x) for Tranche A-1 base rate borrowings, 3.10% through April 2017, 2.95% thereafter through April 2018 and 2.80% thereafter, and for Tranche A-1 Eurodollar rate borrowings, 4.10% through April 2017, 3.95% thereafter through April 2018 and

 

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3.80% thereafter and (y) 3.25% for Tranche A-2 base rate borrowings and revolving facility base rate borrowings and 4.25% for Tranche A-2 Eurodollar rate borrowings and revolving facility Eurodollar rate borrowings. The applicable margin for revolving facility borrowings will be reduced by 0.50% if our Total Leverage Ratio (as defined below) is less than or equal to 2.00:1.00. During the continuance of an event of default, overdue amounts under the Senior Secured Credit Facilities will bear interest at 2.00% plus the otherwise applicable interest rate.

We borrowed the full amount of the Tranche A-1 and Tranche A-2 facilities at the closing of the Credit Agreement. We used a portion of the proceeds from borrowings under the Tranche A-1 and Tranche A-2 facilities to repay in full the amounts outstanding under the Prior Senior Secured Credit Facilities and to pay related fees and expenses. We intend to use, at the closing of this offering, an additional portion of the proceeds of such Tranche A-1 and Tranche A-2 facilities borrowings to make a distribution to our sponsor. Borrowings under the revolving facility may be used for working capital requirements and general partnership purposes, including the issuance of letters of credit.

The Senior Secured Credit Facilities include customary lender and agency fees, including a 1.00% fee that we paid to the lenders at the closing of the Credit Agreement and a commitment fee payable on undrawn revolving facility commitments of 0.50% per annum (subject to stepdown to 0.375% per annum if our Total Leverage Ratio is less than or equal to 2.00:1.00). Letters of credit issued under the revolving facility are subject to a fee calculated at the applicable margin for revolving facility Eurodollar rate borrowings.

Interest is payable quarterly for loans bearing interest at the base rate and at the end of the applicable interest period for loans bearing interest at the Eurodollar rate. The principal amount of the Tranche A-1 facility is payable in quarterly installments of 0.50% through March 2017, 0.75% thereafter through March 2018 and 1.25% thereafter, in each case subject to a quarterly increase of 0.50% during each year if less than 75% of the aggregate projected production capacity of our wood pellet production plants for the two-year period beginning on January 1 of such year is contracted to be sold during such period pursuant to certain qualifying off-take contracts. The principal amount of the Tranche A-2 facility is payable in equal quarterly installments of 0.25%. No amortization is required with respect to the principal amount of the revolving facility. All outstanding amounts under the Senior Secured Credit Facilities will be due and the letter of credit commitments will terminate on the maturity date or upon earlier prepayment or acceleration.

We are required to make mandatory prepayments of the Senior Secured Credit Facilities with the proceeds of certain asset sales and debt incurrences. We may voluntarily prepay the Senior Secured Credit Facilities in whole or in part at any time without premium or penalty, except that prepayments of any portion of the Tranche A-1 or Tranche A-2 facilities made in connection with a repricing transaction (as well as any repricing of the Senior Secured Credit Facilities) prior to the six-month anniversary of the Credit Agreement closing date will incur a premium of 1.00% of amounts prepaid (or repriced).

The Credit Agreement contains certain covenants, restrictions and events of default including, but not limited to, a change of control restriction and limitations on our ability to (i) incur indebtedness, (ii) pay dividends or make other distributions, (iii) prepay, redeem or repurchase certain debt, (iv) make loans and investments, (v) sell assets, (vi) incur liens, (vii) enter into transactions with affiliates, (viii) consolidate or merge and (ix) assign certain material contracts to unrestricted subsidiaries. We will be restricted from making dividends if an event of default exists under the Credit Agreement or if our interest coverage ratio (determined as the ratio of consolidated EBITDA to consolidated interest expense, determined quarterly) is less than 2.25:1.00 at such time.

Pursuant to the Credit Agreement, we are required to maintain, as of the last day of each fiscal quarter, a ratio of total debt to consolidated EBITDA (“Total Leverage Ratio”) of not more than a maximum ratio, initially set at 4.25:1.00 and stepping down to 3.75:1.00 during the term of the Credit Agreement; provided that the maximum permitted Total Leverage Ratio will be increased by 0.50:1.00 for the period from the consummation of certain qualifying acquisitions through the end of the second full fiscal quarter thereafter.

The obligations under the Credit Agreement are guaranteed by certain of our subsidiaries and secured by liens on substantially all of our assets.

 

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Contractual Obligations

The following table presents our contractual obligations and other commitments as of December 31, 2014:

 

Contractual Obligations

   Total      2015      2016-2017      2018-2019  
     (in thousands)  

Long-term debt (1)

   $ 94,714       $ 9,594       $ 83,120       $ 2,000   

Plant construction

                               

Other loans and capital leases

     994         643         271         80   

Operating leases

     6,348         2,135         3,343         870   

Interest expense (2)

     27,164         5,082         22,082           

Related party management services agreement

     42,175         10,612         21,865         9,698   

Purchase obligations (3)

     2,309         2,309                   

Other purchase commitments (4)

     51,690         32,568         19,122           
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 225,394    $ 62,943    $ 149,803    $ 12,648   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our long-term debt as of December 31, 2014 consisted of $88.3 million outstanding, offset by an unamortized discount of $1.6 million, under our Prior Senior Secured Credit Facilities; a promissory note of $0.7 million related to the land purchase for the Southampton plant; a construction loan and working capital line outstanding in the amount of $3.6 million related to Enviva Pellets Wiggins; and a convertible note outstanding in the amount of $2.0 million related to the acquisition of Enviva Pellets Amory.
(2) The cash obligations for interest expense reflect, as of December 31, 2014, (i) interest expense related to $31.4 million of Tranche A advances bearing interest at 5.50%, $57.0 million of delayed draw term facility advances bearing interest at 5.50% and $6.0 million of advances under the letter of credit facility bearing interest at 4.25% under our Prior Senior Secured Credit Facilities, (ii) interest expense related to the $3.6 million Enviva Pellets Wiggins construction loan and working capital line, which bear interest at a rate of 6.35%, and (iii) interest expense related to the Enviva Pellets Amory note, which bears interest at a rate of 6.0%.
(3) At December 31, 2014, we had $2.3 million of purchase obligations which consisted of commitments for the purchase of materials, supplies and the engagement of services for the operation of our facilities to be used in the normal course of business. The amounts presented in the table do not include items already recorded in accounts payable or accrued liabilities at December 31, 2014.
(4) Other purchase commitments consist primarily of commitments under certain wood fiber and pellet supply contracts and handling contracts. Some of our suppliers and service providers commit resources based on our planned purchases and require minimum levels of purchases. The amounts in the table represent an estimate of the costs we would incur under these contracts as of December 31, 2014. Many of our contracts are requirement contracts and currently do not represent a firm commitment to purchase from our suppliers; therefore, they are not reflected in the table above. Under these contracts, we would likely be liable for the costs incurred on services rendered until termination and the costs of any supplies on hand.

In order to mitigate volatility in our shipping costs, we have entered into fixed-price shipping contracts with reputable shippers matching the terms and volumes of our off-take contracts for which we are responsible for arranging shipping. Our contracts with shippers include provisions as to the minimum amount of metric tons per year to be shipped and may also stipulate the number of shipments. These contracts range in terms from one year to nine years and charges are based on a fixed-price per metric ton and some of our contracts include provisions for adjustment for increases in the price of fuel or for demurrage. The price per metric ton may also vary depending on the loading port and the discharge port. Shipping contracts are requirement contracts and currently do not represent a firm commitment. However, our shippers commit their resources based on our planned shipments and we would likely be liable for a portion of their expenses if we deviated from our communicated

 

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plans. As of December 31, 2014, we estimate our obligations related to these shipping contracts to be approximately $171.4 million through 2022. These amounts will be offset by the related sales transactions in the same period and accordingly, we have not included them in the table above.

Quantitative and Qualitative Disclosure of Market Risks

Market risk is the risk of loss arising from adverse changes in market rates and prices. Historically, our risks have been predominantly related to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Our market risk exposure is expected to be limited to risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we use financial instruments or derivative instruments for trading purposes.

Interest Rate Risk

At December 31, 2014, our total debt had a carrying value of $94.1 million, which approximates fair value.

We were exposed to interest rate risk on borrowings under our Prior Senior Secured Credit Facilities. As of December 31, 2014, $86.7 million, net of unamortized discount of $1.6 million, of our total debt related to borrowings under our Prior Senior Secured Credit Facilities. Borrowings under the Tranche A facility, the delayed draw term facility and the working capital facility bear interest, at our option, at either (i) base rate plus an applicable margin or (ii) the greater of 1.25% or Eurodollar rate (or LIBOR) plus an applicable margin, except for borrowings under the working capital facility, which are not subject to the 1.25% floor. Applicable margin is (i) in the case of base rate, 3.25% and (ii) in the case of Eurodollar rate, 4.25%. We are exposed to interest rate risk on borrowings under our new Senior Secured Credit Facilities, and we expect to enter into interest rate swaps to manage our exposure to fluctuations in interest rates thereunder.

Our Prior Credit Agreement required us to swap a minimum of 50% of the term loan balance outstanding under our Prior Senior Secured Credit Facilities, thereby managing our exposure to fluctuations in interest rates. We account for interest rate swaps by recognizing all derivative financial instruments on the consolidated balance sheets at fair value. Our interest rate swaps do not qualify for hedge accounting; therefore, the gain or loss is recognized in the consolidated statements of operations in other income. During 2014, we reduced the notional amount of the interest rate swaps to $60.5 million from $65.0 million at December 31, 2013 to reflect the decrease in the outstanding principal under the term loan of the Prior Senior Secured Credit Facilities.

Changes in the overall level of interest rates affect the interest expense that we recognize in our consolidated statements of operations related to interest rate swap agreements and borrowings. An interest rate risk sensitivity analysis is used to measure interest rate risk by computing estimated changes in cash flows as a result of assumed changes in market interest rates. Based on the $88.3 million outstanding under the Prior Senior Secured Credit Facilities and $60.5 million interest rate swap notional amounts as of December 31, 2014, if LIBOR based interest rates increased by 100 basis points, our interest expense would have increased annually by approximately $0.9 million.

Credit Risk

Substantially all of our revenue was from long-term, take-or-pay off-take contracts with three customers for the year ended December 31, 2014 and four customers for the year ended December 31, 2013. One of the contracts expired in March 2013. Most of our customers are major power generators in Northern Europe. This concentration of counterparties operating in a single industry may increase our overall exposure to credit risk, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. If a customer defaults or if any of our contracts expire in accordance with its terms, and we are unable to renew or replace these contracts, our gross margin and cash flows and our ability to make cash distributions to our unitholders may be adversely affected.

 

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Internal Controls and Procedures

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal controls over financial reporting. We will not be required to make our first assessment of our internal controls over financial reporting until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we will need to implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff.

Further, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act. See “Summary—Emerging Growth Company Status.” Please also see “Risk Factors—Risks Inherent in an Investment in Us—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.”

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers. The new standard provides new guidance on the recognition of revenue and states that an entity should recognize revenue when control of the goods or services transfers to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The new standards also require significantly expanded disclosure regarding qualitative and quantitative information about the nature, timing and uncertainty of revenue and cash flow arising from contracts with customers. The new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The standard permits the use of either applying retrospectively the amendment to each prior reporting period presented or retrospectively with the cumulative effect of initially applying at the date of initial application. We expect to implement the new standard on January 1, 2017 and are in the process of evaluating the impact of adoption on our consolidated financial statements and have not determined which implementation method will be adopted. Our adoption of the new standard is not expected to have a material effect on the recognition of revenue.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.

Listed below are accounting policies we believe are critical to our consolidated financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, which we believe are critical to the understanding of our operations.

 

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Revenue Recognition

We primarily earn revenue by supplying wood pellets to 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 the technical specifications of the product, as well as, in some instances, provides for price adjustments for actual product specification and changes in underlying costs. Revenues from the sale of 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.

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

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

Cost of Goods Sold

Cost of goods sold includes the costs to produce and deliver wood pellets to customers. Raw material, production and distribution costs associated with delivering our wood pellets to our ports and third-party pellet purchase costs are capitalized as a component of inventory. Fixed production overhead, including the related depreciation expense, is allocated to inventory based on the normal capacity of the facilities. These costs are reflected in cost of goods sold when inventory is sold. During the ramp-up period when production volume is often below the expected plant capacity, we charge such under-absorption of fixed overhead to expense. Distribution costs associated with shipping our wood pellets to our customers and amortization are expensed as incurred. Our inventory is recorded using the first-in, first-out method (“FIFO”) which requires the use of judgment and estimates. Given the nature of our inventory, the calculation of cost of goods sold is based on estimates used in the valuation of the FIFO inventory and in determining the specific composition of inventory that is sold to each customer.

Additionally, the purchase price of an acquired customer contract that was recorded as an intangible asset is amortized as deliveries are made under the contract.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, which includes the fair values of assets acquired. Equipment under capital leases are stated at the present value of minimum lease payments. Useful lives of assets are based on historical experience and are adjusted when changes in the expected physical life of the asset, its planned use, technological advances or other factors show that a different life would be more appropriate. Changes in useful lives that do not result in the impairment of an asset are recognized prospectively.

 

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Depreciation and amortization are calculated using the straight-line method based on the estimated useful lives of the related assets. Plant and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.

Construction in progress primarily represents expenditures for the development and expansion of facilities. Capitalized interest cost and all direct costs, which include equipment and engineering costs related to the development and expansion of facilities, are capitalized as construction in progress. Depreciation is not recognized for amounts in construction in progress.

Normal repairs and maintenance costs are expensed as incurred. Amounts incurred that extend an asset’s useful life, increase its productivity or add production capacity are capitalized. Direct costs, such as outside labor, materials, internal payroll and benefit costs, incurred during the construction of a new plant are capitalized; indirect costs are not capitalized. Repairs and maintenance costs were $8.5 million and $4.7 million for the years ended December 31, 2014 and 2013, respectively.

Asset Impairment Assessments

Long-Lived Assets

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

Goodwill

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

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

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

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

 

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For the years ended December 31, 2014 and 2013, we applied the qualitative test and determined that it was more likely than not that the estimated fair value of the reporting unit substantially exceeded the related carrying value, and, accordingly, we were not required to apply the two-step impairment test. We have not recorded any goodwill impairment for the years ended December 31, 2014 and 2013.

In making this qualitative analysis, we evaluated the following economic factors:

 

    Our consolidated financial results reflect continued improved financial performance in 2014 compared to 2013 as reflected by increases in revenue and metric tons sold, as well as the generation of positive net income in 2014.

 

    We continued to expand production capacity with the full year of operations at our Northampton and Southampton plants in 2014.

 

    We now benefit from five production plants that are strategically located in the Southeastern U.S., which is an attractive wood fiber region with an abundance of wood fiber supply, and near multiple transportation points.

 

    We began deliveries under two new customer contracts in 2013.

 

    We have had no cancellations of contracts.

 

    We have expanded our customer base with a sale of wood pellets to an Asian trading house in South Korea in 2013.

 

    Worldwide demand for utility-grade wood pellets is expected to increase to 36.1 million MTPY by 2020 which will result in an estimated 19.2 million MTPY gap between identified supply and forecasted 2020 demand, according to Hawkins Wright, an independent market consultant.

 

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INDUSTRY OVERVIEW

We obtained the information in this prospectus about the utility-grade wood pellet industry from Hawkins Wright, an independent market consultant with expertise in the international forest products and bioenergy industries. The following overview of the industry was prepared with Hawkins Wright’s assistance. Except where noted otherwise, the following discussion assumes an exchange rate of 0.67 pound sterling per U.S. dollar, and 120 yen per U.S. dollar, which are the exchange rates as of March 31, 2015. Substantially all of our contracts are U.S. dollar-denominated.

We define “utility-grade wood pellets” as wood pellets meeting minimum requirements generally specified by industrial consumers and produced and sold in sufficient quantities to satisfy industrial-scale consumption. Wood pellets are also produced and used in smaller scale for residential, commercial and industrial heating purposes. Products move between the utility-grade and heating pellet markets, but each market displays distinct characteristics. Like us, most suppliers specialize in serving one market or the other.

Introduction

Utility-grade wood pellets are used as a substitute for coal in both converted and co-fired power generation and combined heat and power (“CHP”) plants. They enable major power generators to profitably generate electricity in a manner that reduces the overall cost of compliance with mandatory greenhouse gas (“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 small fraction of the capital costs associated with implementing offshore wind and most other renewable and low-carbon 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 or the introduction of taxes or other restrictions on fossil fuel usage or emissions of GHGs and other pollutants.

 

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Worldwide demand for utility-grade wood pellets is projected by Hawkins Wright to grow from approximately 11.5 million MTPY in 2014 to 18.6 million MTPY in 2016 and to 36.1 million MTPY in 2020, representing a compound annual growth rate (“CAGR”) of approximately 21% from 2014 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 6.5 million MT in 2014, which equates to a CAGR of 30%. 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 and to 60% in 2014. Worldwide capacity to produce utility-grade wood pellets is estimated by Hawkins Wright to be 11.6 million MTPY as of December 31, 2014. Wood pellet projects that are presently under construction or that have committed sources of financing, including the Sampson plant of the Wilmington Projects being developed by our sponsor and the Hancock JV, are expected to raise production capacity to only 16.9 million MTPY by the end of 2016. The resulting 19.2 million MTPY gap between identified supply and forecasted 2020 demand is depicted in the chart below.

LOGO

 

(1) Represents supply available in North America excluding Enviva.
(2) Includes the Southampton plant and the Sampson plant but excludes the rest of the Wilmington Projects.

 

     Source: Hawkins Wright

A substantial number of additional wood pellet production plants, as well as associated export terminals and logistics infrastructure, must be built if the gap between forecasted demand and identified supply is to be closed. Assuming a typical investment cost of approximately $220 per MT of wood pellet production capacity, Hawkins Wright expects that approximately $480.0 million will need to be invested in new production plants by 2016 and approximately $4.3 billion will need to be invested in such plants by 2020. Due to its abundant forest resources, low wood fiber cost and established logistics infrastructure, the Southern U.S., where our production plants are located, is currently the preeminent wood pellet producing region.

 

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Global Demand for Utility-Grade Wood Pellets

Due to significant demand from power generators in the United Kingdom, Denmark, Belgium, the Netherlands and Sweden, Europe accounted for approximately 80.9% of 2014 worldwide consumption of utility-grade wood pellets. By 2020, worldwide demand is forecasted to be 36.1 million MTPY of wood pellets, with 25.6 million MTPY of demand forecasted for Europe, 6.2 million MTPY forecasted for Asia (principally in South Korea and Japan) and 4.0 million MTPY forecasted for the United States.

European power generators are making significant investments in projects that consume utility-grade wood pellets. Drax, the owner of Europe’s largest coal-fired power station, intends to become a predominantly biomass-fired generator by 2016. Drax is investing £650.0 million to £700.0 million ($965.0 million to $1.04 billion) to convert three of the six 660 MW generating units at its power station in the United Kingdom to burn utility-grade wood pellets. The feasibility of converting a fourth generating unit is currently being studied. The conversion of the first unit was completed in April 2013, and the second converted unit came online in May 2014 and is now burning wood pellets exclusively. When all three units are converted by 2016, Drax will consume approximately 8.0 million MTPY of wood pellets. Other European power generators, including Eggborough Power (UK), RWE (UK and the Netherlands), GDF (Belgium and the Netherlands), E.ON (the Netherlands, Belgium and France), DONG Energy (Denmark) and Vattenfall (Sweden, the Netherlands and Denmark) have also announced significant wood pellet-fired projects. These and other power generators are negotiating firm, long-term wood pellet off-take contracts to ensure they have access to the fuel required to support their capital investments. These long-term contracts, which often have notional values in excess of $1.0 billion, require the power generators to assume a substantial portion of the fuel supplier’s risks, including currency fluctuations, inflation, increases in raw material and other wood pellet production costs, freight costs and regulatory changes. Based upon the tenor and underlying financial exposure created by such contracts and the substantial capital being invested by power generators, we believe that the power generators will require wood pellets well into the next decade.

To support the expected growth in demand for utility-grade wood pellets, significant parallel investments are being made in new and improved port and logistics infrastructure on both sides of the Atlantic Ocean. In the U.S., such infrastructure includes our deep-water marine terminal in Chesapeake, VA, the Hancock JV’s planned Wilmington terminal and third-party export terminals in Panama City, FL (which we lease), Savannah and Brunswick, GA, and Baton Rouge, LA. In Europe, substantial investments are being made in the UK ports of Tyne, Immingham, Hull and Liverpool, the Dutch ports of Amsterdam and Rotterdam and the Belgian port of Antwerp. For example, the Port of Tyne recently invested £23.0 million ($35.2 million) in a new wood pellet terminal, enabling it to handle up to 1.5 million MTPY of wood pellets. The port is investing an additional £180.0 million ($267.3 million) in a wider expansion, incorporating fuel storage, rail connectivity and quay improvements. At the Port of Immingham, Associated British Ports is investing £75.0 million ($111.4 million) in wood pellet handling equipment that will enable it to accept Panamax-size bulk carriers and handle up to 3.0 million MTPY of wood pellets. Port improvements will include a new quayside discharge plant, conveyors, rail loading facilities and four storage silos with a combined capacity of up to 100,000 MT of wood pellets.

Furthermore, Hawkins Wright believes that new non-energy markets for wood pellets may emerge in the future. One such potential market is the use of pellets as a biochemical feedstock. Wood comprises many of the complex hydrocarbons of interest to manufacturers of biochemicals, bioplastics and second generation cellulosic biofuels. Wood is arguably the world’s most plentiful source of sustainable lignocellulosic biomass, and one that does not compete directly for land that will be needed for food production. In addition, because wood does not compete with food crops and its supply is not dependent on the variability of the weather, biochemical manufacturers are better able to forecast and manage the costs of wood-based feedstock, thus reducing their project risk.

 

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Drivers of Demand Growth for Utility-Grade Wood Pellets

Policymakers in many countries around the world, particularly in Europe, are grappling with an “energy trilemma”: how to meet legally binding renewable energy and carbon reduction targets in a manner that is affordable and ensures the security of their electricity systems. In certain European Union (“EU”) countries, notably the United Kingdom, there is a growing shortage of baseload generation capacity resulting from binding obligations to reduce GHG and other harmful emissions. At the same time, all EU countries are subject to mandates to significantly increase renewable energy consumption. Under these circumstances, the ability of power generators to convert coal-fired plants to biomass-fired generation relatively quickly and inexpensively should position the utility-grade wood pellet industry for rapid growth. Policy frameworks are evolving accordingly, and the projected growth in utility-grade wood pellet demand is principally a response to this “energy trilema.”

Existing EU Policy Framework

By 2020, EU member states are legally required to reduce aggregate GHG emissions by 20% relative to the EU’s GHG emissions in 1990. EU member states have been assigned varying targets that broadly reflect their relative per capita income. Following the closure of coal- and natural gas-fired plants, some of these member states already face shortages in the baseload generation capacity that is essential to maintain reliable electricity distribution networks. Many coal plants have been closed due to governmental policies designed to reduce GHG and other emissions. For example, since December 2012, 6.5 GW of coal-fired power generation capacity has been closed in the UK, and a further 2.3 GW is scheduled to close by early 2016. In addition, high natural gas prices, low electricity prices and competition from wind and solar power have seriously undermined the economics of gas-fired generation in Europe. In 2013, GDF mothballed approximately 10 GW of gas-fired generation capacity and placed between 5 GW and 7 GW of additional capacity under review, according to estimates in a paper published by the Oxford Institute of Energy Studies. The same paper estimates that more than 30 GW of gas-fired generating capacity may have been mothballed by early 2014 and up to 40 GW could be shut down or mothballed during 2015.

The UK faces particular challenges. As a result of plant closures, the UK’s derated capacity margin, which represents excess generation capacity, is expected to drop to approximately 3% in winter 2015/2016, from approximately 9% in 2013/2014, according to the UK’s Office for Gas and Electricity Markets. This level of excess capacity is generally regarded as insufficient to ensure the security and stability of electricity supply. By comparison, the capacity margin in the U.S. is currently approximately 20% and 30% for the summer and winter periods, respectively.

The shortages in baseload and dispatchable generation capacity are exacerbated by the growing use of wind and solar energy to generate electricity. Wind and solar generation, which only produce power when the wind is blowing or the sun is shining, present different challenges for electricity grid operators. The intermittent nature of these sources of electricity has resulted in wide swings in available capacity. Therefore, power generators and grid operators need back-up capacity that can fill the generation gap that results when these intermittent sources are unavailable and that also can be scaled back when intermittent sources are generating power. In order to meet the EU’s mandatory GHG emission-reduction targets and the renewable energy commitments discussed below, much of this new generation must qualify as low-carbon and renewable.

In addition to being required to substantially reduce aggregate GHG emissions, EU member states are legally required to achieve targets that, by 2020, would result in 20% of all energy supplied to the final consumer, which is referred to as “final energy consumption,” coming from renewable sources. Energy generated from wood pellets is a recognized form of renewable energy under EU law. Each member state has been assigned individual renewable energy targets that must be achieved by 2020. Most EU member states are still significantly short of achieving their respective 2020 renewable targets, with renewable energy accounting for 15.0% of final energy consumption in the EU in 2013 (the latest year for which such data is currently available), five percentage points short of the 2020 mandate.

 

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The following graph depicts the renewable energy consumption, in 2013, of certain EU member states and the shortfalls against their respective 2020 renewable energy targets. The shortfalls assume no change in final energy consumption between 2013 and 2020. </