(2) Significant Accounting Policies

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

Use of Estimates

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

Revenue Recognition

The Partnership primarily earns revenue by supplying wood pellets to its customers under off-take contracts, the majority of the commitments under which are long-term in nature. The Partnership refers to the structure of its off-take contracts as “take-or-pay” because they include a firm obligation of the customer to take a fixed quantity of product at a stated price and provisions that ensure the Partnership will be compensated in the case of a customer’s failure to accept all or a part of the contracted volumes or termination of a contract by a customer. The Partnership’s long-term off-take contracts define the annual volume of wood pellets that a customer is required to purchase and the Partnership is required to sell, the fixed price per metric ton for product satisfying a base net calorific value and other technical specifications. 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 indicies. In addition to sales of the Partnership’s product under these long-term off-take contracts, the Partnership routinely sells wood pellets under shorter-term contracts, which range in volume and tenor and, in some cases, may include only one specific shipment. Because each of the Partnership’s off-take contracts is a bilaterally negotiated agreement, the Partnership’s revenue over the duration of such contracts does not generally follow observable current market pricing trends. The Partnership’s performance obligation under these contracts include the delivery of wood pellets, and are aggregated into metric tons. The Partnership accounts for each metric ton as a single performance obligation. The Partnership’s revenue from the sales of wood pellets it produces is recognized as “Product sales” upon satisfaction of the Partnership’s performance obligation when control transfers to the customer at the time of loading wood pellets onto a ship.

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

In some cases, the Partnership may purchase shipments of product from third-party suppliers and resell them in back-to-back transactions (“purchase and sale transactions”). The Partnership has determined that it is the principal in these transactions because it controls the pellets prior to transferring them to the customer and therefore recognizes related revenue on a gross basis in “Product sales.”

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

The Partnership recognizes third- and related-party terminal services revenue ratably over the contract term at its ports, which is included in “Other revenue.” Terminal services are performance obligations that are satisfied over time, as customers simultaneously receive and consume the benefits of the terminal services performed by the Partnership. The consideration is generally fixed for minimum quantities and above the minimum are generally billed based on a per-ton rate.

The Partnership expects to recognize approximately $5.9 billion in revenue from its remaining performance obligations related to “Product sales” and “Other revenue” with fixed consideration. Most of the Partnership’s off-take contracts expire by 2027, and two contracts expire in 2034. The Partnership’s terminal services contracts extend to 2026. Remaining performance obligations are as follows:



	Period from April 1, 2018 to December 31, 2018		2019		Thereafter		Total
Product sales	$	505,344	$	600,003	$	4,836,670	$	5,942,017
Other revenue		531		708		1,180		2,419
Total revenue	$	505,875	$	600,711	$	4,837,850	$	5,944,436

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

Variable consideration from terminal services contracts arises from price increases based on agreed inflation indices and from above-minimum throughput quantities or services, which were not material for the three months ended March 31, 2018.

The Partnership allocates variable consideration under its off-take and terminal services contracts entirely to each performance obligation to which variable consideration relates. The estimate of variable consideration represents the amount that is not more likely than not to be recovered. For the three months ended March 31, 2018, the Partnership recognized an insignificant amount of revenue related to performance obligations satisfied during fiscal year ended December 31, 2017.

Under the Partnership’s off-take contracts, customers are obligated to pay the majority of the purchase price prior to the arrival of the ship at the customers’ discharge port. The remaining portion is paid after the wood pellets are unloaded at the discharge port. The Partnership generally recognizes revenue prior to the issuance of an invoice to the customer. Accounts receivable related to “Product sales” as of March 31, 2018 and December 31, 2017 was $42.5 million and $78.0 million, respectively.

Cost of Goods Sold

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

Recently Adopted Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 and subsequent amendments were codified as ASC 606. ASC 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Partnership recognizes revenue under ASC 606 and all related amendments, which it adopted on January 1, 2018, using the modified retrospective transition method.

The Partnership determined that, upon adoption of the ASC 606, its off-take contracts will continue to be classified as “Product sales.” Revenue is recognized at the point in time at which control of the wood pellets passes to the customer as the wood pellets are loaded onto shipping vessels, which is consistent with the timing of revenue recognition under the Partnership’s legacy accounting policy. However, the adoption of ASC 606 impacted the basis of presentation for purchase and sale transactions. Prior to the adoption of ASC 606, the Partnership reported revenue from purchase and sale transactions net of costs paid to third-party suppliers, which was classified as “Other revenue.” Subsequent to the adoption of ASC 606, the Partnership recognizes revenue on a gross basis in “Products sales” when it determines that it acts as a principal and controls the wood pellets before they are transferred to the customer. The decision as to whether to recognize revenue on a gross or net basis requires significant judgment.

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

The Partnership disaggregates its revenue into two categories: “Product sales” and “Other revenue”. These categories best reflect the nature, amount, timing and uncertainty of the Partnership’s revenue and cash flows.

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

The table below indicates the impact of the adoption of ASC 606 on revenue and cost of goods sold for the three months ended March 31, 2018:


	As Reported		Adoption of ASC 606		Without Adoption of ASC 606
Product sales	$	122,799	$	(6,221)	$	116,578
Other revenue		3,002		(53)		2,949
Cost of goods sold		130,342		(6,274)		124,068
Gross margin	$	(4,541)	$	—	$	(4,541)

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

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows (Topic 230)—Restricted Cash: A Consensus of the FASB Emerging Issues Task Force, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance addresses the presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. The Partnership adopted ASU 2016-18 as of January 1, 2018, which resulted in an increase of $0.9 million in “Net cash provided by operating activities” and an increase of $0.9 million in “Cash, cash equivalents and restricted cash, end of period” in the Partnership’s condensed consolidated statements of cash flows for the three months ended March 31, 2017. As of March 31, 2017, $0.9 million was designated as restricted cash due to restrictions on its withdrawal and use pursuant to a security agreement.

In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments, which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing the existing diversity in practice. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. An entity will first apply any relevant guidance. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source of use. The Partnership adopted ASU 2016-18 as of January 1, 2018 and there was no material effect on how cash receipts and cash payments are presented and classified in the condensed consolidated statement of cash flows occurred.

Recently Issued Accounting Standards not yet Adopted

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This standard will be implemented prospectively in 2020 for all future goodwill impairment tests and will simplify such evaluations.

In February 2016, the FASB issued ASU 2016-02, Leases. Under the new pronouncement, an entity is required to recognize right-of-use (“ROU”) assets and lease liabilities arising from a lease for all non-cancellable leases. The Partnership is expected to apply this guidance to all non-cancellable leases with a term of more than 12 months. The new guidance is effective for public entities for fiscal year and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. Upon adoption, a lessee and a lessor would recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Partnership is in the process of preparing the implementation plan and is evaluating the impact of adoption on its business processes and accounting and information systems. A multi-discipline implementation team has gained an understanding of the standard’s accounting and disclosure provisions and is working to evaluate the impact of adoption on the Partnership’s consolidated financial statements. The Partnership currently expects changes related to the recognition of new ROU assets and lease liabilities on its balance sheet for its real estate and machinery and equipment operating leases. The Partnership is currently evaluating whether its long-term wood pellet supply arrangements, throughput agreements to receive terminal services, and certain fixed-price long-term logistics arrangements contain leases. The Partnership does not expect a significant change in its leasing activity prior to adoption of the ASU. The Partnership is in the process of evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.