ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2020 AND 2019
TABLE OF CONTENTS
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| Condensed Consolidated Balance Sheets | |
| Condensed Consolidated Statements of Operations | |
| Condensed Consolidated Statements of Changes in Member’s Capital | |
| Condensed Consolidated Statements of Cash Flows | |
| Notes to Condensed Consolidated Financial Statements | |
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ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
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| March 31, 2020 | | December 31, 2019 |
| (unaudited) | | (Predecessor) |
| Assets | | | |
| Current assets: | | | |
| Cash | $ | 24 | | | $ | 16 | |
| Related-party receivables | 1,410 | | | 1,371 | |
| Other receivables | 1,379 | | | 1,391 | |
| Inventories | 5,164 | | | 4,635 | |
| Prepaid expenses and other current assets | 32 | | | 41 | |
| Total current assets | 8,009 | | | 7,454 | |
| Property, plant and equipment, net | 106,314 | | | 107,123 | |
| Operating lease right-of-use assets | 8,077 | | | 8,301 | |
| Intangible assets, net | 964 | | | 1,083 | |
| Other long-term assets | 71 | | | 71 | |
| Total assets | $ | 123,435 | | | $ | 124,032 | |
| Liabilities and Member's Capital | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 2,622 | | | $ | 3,604 | |
| Related-party payables | 1,906 | | | 1,046 | |
| Accrued and other current liabilities | 5,715 | | | 3,349 | |
| Interest payable | 118 | | | 920 | |
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| Current portion of long-term debt and finance lease obligations | 2,674 | | | 2,678 | |
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| Total current liabilities | 13,035 | | | 11,597 | |
| Long-term debt and finance lease obligations | 34,370 | | | 36,569 | |
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| Long-term operating lease liabilities | 6,879 | | | 7,109 | |
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| Total liabilities | 54,284 | | | 55,275 | |
| Member's capital: | | | |
| Total member's capital | 69,151 | | | 68,757 | |
| Total liabilities and member's capital | $ | 123,435 | | | $ | 124,032 | |
See accompanying notes to condensed consolidated financial statements.
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
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| Three Months Ended March 31, | | |
| 2020 | | 2019 |
| | | (Predecessor) |
| Related-party product sales | $ | 8,587 | | | $ | 6,441 | |
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| Cost of goods sold | 15,584 | | | 15,345 | |
| Depreciation and amortization | 2,775 | | | 3,119 | |
| Total cost of goods sold | 18,359 | | | 18,464 | |
| Gross margin | (9,772) | | | (12,023) | |
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| Related-party management services agreement expense | 597 | | | 584 | |
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| Loss from operations | (10,369) | | | (12,607) | |
| Other expense: | | | |
| Interest expense | (588) | | | (634) | |
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| Total other expense | (588) | | | (634) | |
| Net loss | $ | (10,957) | | | $ | (13,241) | |
See accompanying notes to condensed consolidated financial statements.
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Member’s Capital
(In thousands)
(Unaudited)
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| Balance at December 31, 2019 (Predecessor) | $ | 68,757 | |
| Contributed capital | 8,222 | |
| Cost of goods sold contributed by Member | 2,394 | |
| General and administrative expenses contributed by Member | 735 | |
| Net loss | (10,957) | |
| Balance at March 31, 2020 | $ | 69,151 | |
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| Balance at December 31, 2018 (Predecessor) | $ | 84,230 | |
| Contributed capital | 6,221 | |
| General and administrative expenses contributed by Member | 84 | |
| Net loss | (13,241) | |
| Balance at March 31, 2019 (Predecessor) | $ | 77,294 | |
See accompanying notes to condensed consolidated financial statements.
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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| Three Months Ended March 31, | | |
| 2020 | | 2019 |
| | | (Predecessor) |
| Cash flows from operating activities: | | | |
| Net loss | $ | (10,957) | | | $ | (13,241) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 2,902 | | | 3,054 | |
| Amortization of debt issuance costs | 341 | | | 389 | |
| Cost of goods sold contributed by Member | 2,394 | | | | — | |
| General and administrative expense contributed by Member | 735 | | | 84 | |
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| Change in operating assets and liabilities: | | | |
| Other receivables | 12 | | | 8 | |
| Related-party receivables | (39) | | | 3,626 | |
| Inventories | (529) | | | (219) | |
| Prepaid expenses and other assets | 8 | | | 4 | |
| Accrued interest | (802) | | | (886) | |
| Accounts payable, accrued liabilities and other current liabilities | 867 | | | 735 | |
| Related-party payables | 860 | | | 3,758 | |
| Operating lease liabilities | (365) | | | (195) | |
| Net cash used in operating activities | (4,573) | | | (2,883) | |
| Cash flows from investing activities: | | | |
| Purchases of property, plant and equipment | (1,101) | | | (804) | |
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| Net cash used in investing activities | (1,101) | | | (804) | |
| Cash flows from financing activities: | | | |
| Principal payments on debt | (2,500) | | | (2,500) | |
| Payment on finance lease obligations | (40) | | | — | |
| Contributions from Member | 8,222 | | | 6,221 | |
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| Net cash provided by financing activities | 5,682 | | | 3,721 | |
| Net increase in cash | 8 | | | 34 | |
| Cash, beginning of period | 16 | | | 41 | |
| Cash, end of period | $ | 24 | | | $ | 75 | |
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| Non-cash investing and financing activities: | | | |
| Property, plant and equipment included in accrued and other current liabilities | $ | 1,685 | | | | $ | (7) | |
| Supplemental Information: | | | | | | |
| Interest paid | $ | 1,069 | | | | $ | 1,125 | |
See accompanying notes to condensed consolidated financial statements.
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise noted)
(Unaudited)
(1) Description of Business and Basis of Presentation
Description of Business
Enviva Pellets Greenwood Holdings II (the “Company”) was organized as a Delaware limited liability company in January 2020 and is a wholly-owned subsidiary of Enviva Development Holdings, LLC (“Enviva Development”). In January 2020 (the “Acquisition Date”), Greenwood Holdings II acquired 100% of the membership interests of Greenwood Holdings. Enviva Pellets Greenwood Holdings, LLC (“Greenwood Holdings”) was organized as a Delaware limited liability company in December 2019 and, effective January 1, 2020, acquired 100% of the membership interests in Enviva Pellets Greenwood, LLC (“Greenwood”) from Enviva JV Development Company, LLC, a Delaware limited liability company (“JV Development”). JV Development is a consolidated subsidiary of Enviva Holdings, LP, a Delaware limited partnership (“Enviva Holdings”). Greenwood was organized as a Delaware limited liability company in December 2016.
Greenwood owns a wood pellet production plant located in Greenwood, South Carolina (the “Greenwood plant”). Greenwood procures wood fiber and processes it into utility-grade wood pellets and loads the finished wood pellets onto railcars that are delivered to its sole customer and related-party Enviva Partners, LP, (the “Partnership”), a consolidated subsidiary of Enviva Holdings.
The Company does not own any assets other than its 100% member interest in Greenwood Holdings, does not have any liabilities, and did not have any income or expenses. Greenwood Holdings does not own any assets other than its 100% member interest in Greenwood, does not have any liabilities, and did not have any income or expenses.
The financial statements presented herein for periods prior to and including the Acquisition Date pertain to Greenwood, the predecessor of the Company, and all reference to the “Company” prior to the Acquisition Date refer to Greenwood.
Basis of Presentation
The unaudited condensed consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Quarterly Financial Statements and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of the Company’s management, all adjustments and accruals necessary for a fair presentation have been included. All such adjustments and accruals are of a normal and recurring nature unless disclosed otherwise. All significant intercompany balances and transactions have been eliminated in consolidation. The results reported in the financial statements are not necessarily indicative of the results that may be reported for the entire year.
The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes included in the Annual Financial Statements of Greenwood for the year ended December 31, 2019.
(2) Significant Accounting Policies
Use of Estimates
During interim periods, the Company follows the accounting policies disclosed in the Annual Financial Statements for the year ended December 31, 2019.
Recently Adopted Accounting Standards
On January 1, 2020, the Company adopted Accounting Standards Update 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as issued by the Financial Accounting Standards Board which changes how entities measure credit losses for most financial assets. The adoption did not have a material impact on the financial statements.
Recently Issued Accounting Standards not yet Adopted
Currently, there are no recently issued accounting standards not yet adopted by the Company that are expected to be reasonably likely to materially impact the financial position, results of operations or cash flows of the Company.
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands, unless otherwise noted)
(Unaudited)
(3) Revenue
The Company earns product sales revenue by supplying wood pellets under a long-term off-take contract (the “EVA Contract”) by and between Greenwood and the Partnership. The EVA Contract expires on March 31, 2022.
Performance Obligations
As of March 31, 2020, the amount from the EVA Contract allocated to performance obligations that was unsatisfied or partially satisfied was approximately $127.3 million. As of April 1, 2020, the Company expects to recognize approximately 28% of its remaining performance obligations as revenue during the remainder of 2020, approximately 57% in 2021, and the balance thereafter in 2022. Related-party product sales from the Partnership accounted for all of the Company’s product sales during the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, the Company recognized no revenue related to performance obligations satisfied in previous periods.
Contract Balances
For the three months ended March 31, 2020 and 2019, the Company earned related-party product sales revenue from its off-take contract with the Partnership. During the three months ended March 31, 2020, the Company sold $8.6 million of wood pellets, net of a cost of cover deficiency fee of approximately $0.9 million, to the Partnership. During the three months ended March 31, 2019, the Company sold $6.4 million, net of a cost of cover deficiency fee of approximately $3.6 million, to the Partnership. As of March 31, 2020 and December 31, 2019, $1.4 million and $1.3 million, respectively, is included in related-party receivables for wood pellets sold to the Partnership. As of March 31, 2020 and December 31, 2019, the Company had no deferred revenue for performance obligations to be satisfied in the future.
(4) Inventories
Inventories consisted of the following as of:
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| March 31, 2020 | | December 31, 2019 |
| | | (Predecessor) |
| Raw materials | $ | 648 | | | $ | 353 | |
| Consumable tooling | 4,006 | | | 4,175 | |
| Finished goods | 510 | | | 107 | |
| Total inventories | $ | 5,164 | | | $ | 4,635 | |
(5) Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following as of:
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| March 31, 2020 | | December 31, 2019 |
| | | (Predecessor) |
| Land | $ | 702 | | | $ | 702 | |
| Land improvements | 2,940 | | | 2,940 | |
| Buildings | 47,682 | | | 47,682 | |
| Machinery and equipment | 73,309 | | | 73,309 | |
| Vehicles | 278 | | | 278 | |
| Furniture and office equipment | 988 | | | 949 | |
| Property, plant and equipment | 125,899 | | | 125,860 | |
| Less accumulated depreciation | (23,963) | | | (21,180) | |
| Property, plant and equipment, net | 101,936 | | | 104,680 | |
| Construction in progress | 4,378 | | | 2,443 | |
| Total property, plant and equipment, net | $ | 106,314 | | | $ | 107,123 | |
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands, unless otherwise noted)
(Unaudited)
Total depreciation expense was $2.7 million and $3.0 million for the three months ended March 31, 2020 and 2019, respectively.
(6) Long-Term Debt and Finance Lease Obligations
Long-term debt and finance lease obligations consisted of the following as of:
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| March 31, 2020 | | December 31, 2019 |
| | | (Predecessor) |
| Seller Note, net of unamortized discount | | $ | 36,546 | | | $ | 38,705 | |
| Finance leases | | 498 | | | 542 | |
| Total long-term debt and finance lease obligations | | 37,044 | | | 39,247 | |
| Less current portion of long-term debt and finance lease obligations | | 2,674 | | | 2,678 | |
| Long-term debt and finance lease obligations, excluding current installments | | $ | 34,370 | | | $ | 36,569 | |
Unamortized discount of the Seller Note as of March 31, 2020 and December 31, 2019 was $3.5 million and $3.8 million, respectively. Amortization expense included in interest expense for the three months ended March 31, 2020 and March 31, 2019 was $0.3 million and $0.4 million, respectively.
(7) Leases
Operating lease ROU assets and liabilities and finance leases were as follows:
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| | March 31, 2020 | | December 31, 2019 |
| | | | (Predecessor) |
| Operating leases: | | | | |
| Operating lease right-of-use assets | | | $ | 8,077 | | | $ | 8,301 | |
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| Current portion of operating lease liabilities | | | $ | 900 | | | $ | 886 | |
| Long-term operating lease liabilities | | | 6,879 | | | 7,109 | |
| Total operating lease liabilities | | | $ | 7,779 | | | $ | 7,995 | |
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| Finance leases: | | | | |
| Property plant and equipment, net | | | $ | 452 | | | $ | 542 | |
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| Current portion of long-term finance lease obligations | | | $ | 174 | | | $ | 178 | |
| Long-term finance lease obligations | | | 324 | | | 364 | |
| Total finance lease liabilities | | | $ | 498 | | | $ | 542 | |
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ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands, unless otherwise noted)
(Unaudited)
Operating and finance lease costs were as follows:
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| | | | Three Months Ended March 31, | | |
| Lease Cost | | Classification | | 2020 | | 2019 |
| | | | | | (Predecessor) |
| Operating lease cost: | | | | | | |
| Fixed lease cost | | Cost of goods sold | | $ | 383 | | | $ | 298 | |
| Short-term lease costs | | Cost of goods sold | | 387 | | | 276 | |
| | Total operating lease costs | | 770 | | | 574 | |
| Finance lease cost: | | | | | | |
| Amortization of leased assets | | Depreciation and amortization | | 46 | | | — | |
| Variable lease cost | | Cost of goods sold | | 4 | | | | — | |
| Interest on lease liabilities | | Interest expense | | 6 | | | — | |
| | Total finance lease costs | | 56 | | | — | |
| | Total lease costs | | $ | 826 | | | $ | 574 | |
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Operating and finance lease cash flow information was as follows:
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| Three Months Ended March 31, | | |
| 2020 | | 2019 |
| | | (Predecessor) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 365 | | | $ | 314 | |
| Operating cash flows from finance leases | 6 | | | — | |
| Financing cash flows from finance leases | 44 | | | — | |
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| Assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | — | | | $ | 5,047 | |
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The future minimum lease payments and the aggregate maturities of operating and finance lease liabilities are as follows as of March 31, 2020:
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| Years Ending December 31, | | Operating
Leases | | Finance
Leases | | Total |
| 2020 | | | $ | 1,104 | | | $ | 149 | | | $ | 1,253 | |
| 2021 | | | 1,449 | | | 199 | | | 1,648 | |
| 2022 | | | 1,397 | | | 182 | | | 1,579 | |
| 2023 | | | 1,349 | | | — | | | 1,349 | |
| 2024 | | | 1,349 | | | — | | | 1,349 | |
| Thereafter | | 3,626 | | | — | | | 3,626 | |
| Total lease payments | | 10,274 | | | 530 | | | 10,804 | |
| Less: imputed interest | | 2,495 | | | 32 | | | 2,527 | |
| Total present value of lease liabilities | | $ | 7,779 | | | $ | 498 | | | $ | 8,277 | |
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands, unless otherwise noted)
(Unaudited)
The weighted-average remaining lease terms and discount rates for our operating and finance leases were weighted using the undiscounted future minimum lease payments and are as follows as of March 31, 2020:
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| Weighted average remaining lease term (years): | |
| Operating leases | 7 | |
| Finance leases | 3 | |
| Weighted average discount rate: | |
| Operating leases | 8 | % |
| Finance leases | 5 | % |
(8) Related-Party Transactions
Management Services Agreement
Pursuant to a management services agreement (the “MSA”) between JV Development and Enviva Management Company, LLC, a Delaware limited liability company (“Enviva Management”) and a consolidated subsidiary of Enviva Holdings, Enviva Management, as an independent contractor, provides the development, construction and operation of the assets and properties of JV Development’s development projects and provides other services to JV Development and its direct and indirect subsidiaries.
JV Development incurs all direct or indirect internal or third-party expenses in connection with the MSA on behalf of the Company. Direct or indirect internal or third-party expenses incurred are either directly identifiable or allocated to the Company. Enviva Management estimates the percentage of salary, benefits, third-party costs, office rent, and expenses and any other overhead costs incurred by Enviva Management associated with the MSA.
The costs reflected in the statements of operations of the Company include costs associated with the MSA. Under the MSA, the Company directly incurs costs from Enviva Management for all direct reasonable and necessary costs and expenses (other than general and administrative) incurred by, or chargeable to, Enviva Management in connection with the MSA. In addition, JV Development allocates to the Company a portion of the MSA costs from Enviva Management based on estimated percentages of salary, benefits, third-party costs, office rent, and expenses and any other overhead costs incurred.
Management believes the estimates underlying the financial statements, including the estimates regarding the allocation of MSA costs from JV Development, are reasonable. The financial statements may not include all of or may include more than the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented and may not reflect the results of operations, financial position and cash flows had the Company operated as a standalone company during the periods presented. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas. Also, the Company may have incurred lower or higher costs associated with being a standalone company that were not included in the expense allocations and, therefore, would result in different costs than are reflected in the historical results of operations, financial position and cash flows.
During the three months ended March 31, 2020 and 2019, the Company incurred $3.2 million and $2.5 million, respectively, of MSA fees, of which $2.1 million and $1.5 million, respectively, are included in cost of goods sold. At March 31, 2020 and 2019, $0.5 million and $0.4 million, respectively, incurred under the MSA were included in finished goods inventory.
During the three months ended March 31, 2020 and 2019, MSA fees of $0.6 million and $0.6 million, respectively from JV Development were recorded as related-party management services agreement fee. The MSA fees of $0.6 million during the three months ended March 31, 2020 were recorded as an increase to member’s capital. Of the MSA fees from JV Development, the Company paid JV Development $0.5 million during the three months ended March 31, 2019, with the excess MSA amounts recorded as an increase to member’s capital.
EVA Contract
Pursuant to the EVA Contract, the Company has contracted with the Partnership to sell wood pellets produced by the Greenwood plant through March 2022 and the Partnership has a take-or-pay obligation with respect to 550,000 metric tons per
ENVIVA PELLETS GREENWOOD HOLDINGS II, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands, unless otherwise noted)
(Unaudited)
year (“MTPY”) of wood pellets from July 2019 through March 2022. Pursuant to an amendment dated January 2020, the take-or-pay period has been deferred to 2021. The EVA Contract provides for deficiency fees to the Partnership if the Company does not meet its delivery obligations thereunder.
During the three months ended March 31, 2020, the Company sold $9.5 million of wood pellets, net of a cost of cover deficiency fee of approximately $0.3 million as the Company did not satisfy certain commitments to the Partnership. During the three months ended March 31, 2019, the Company sold $10.0 million of wood pellets, net of a cost of cover deficiency fee of approximately $3.0 million as the Company did not satisfy certain commitments to the Partnership.
As of March 31, 2020 and December 31, 2019, $1.4 million and $1.3 million, respectively, are included in related-party receivables related to the Company’s wood pellet sales to the Partnership and approximately $1.1 million as of March 31, 2020 and $0.7 million as of December 31, 2019 is included in related-party payables related to the cost of cover deficiency fee.
Terminal Services Agreements
The Company is party to a terminal services agreement with Wilmington (the “Wilmington TSA”), Enviva Port of Wilmington, LLC, a wholly owned subsidiary of the Partnership (“Wilmington”), which provides for wood pellet receipt, storage, handling and loading services by the terminal assets owned by Wilmington for the Company’s production. The Wilmington TSA requires the Company to deliver a minimum of 125,000 MT of wood pellets per quarter and pay a fixed fee on a per-ton basis for the terminal services. The Wilmington TSA remains in effect until September 1, 2026. The Wilmington TSA provides for deficiency payments to Wilmington if minimum throughput requirements are not met. During each of the three months ended March 31, 2020 and 2019, the Company incurred $0.6 million of deficiency fees pursuant to the Wilmington TSA, which reduced related-party product sales on the statements of operations. As of March 31, 2020 and December 31, 2019, $0.6 million and $0.2 million, respectively, was included in related-party payables related to the Wilmington TSA.
(9) Subsequent Events
The Company has evaluated subsequent events for the period March 31, 2020 through July 7, 2020, the date these financial statements were issued and, other than as disclosed below, there have been no subsequent events for which disclosure is required.
On July 1, 2020, Enviva Development contributed its interests in the Greenwood Holdings II to the Partnership for a purchase price of $132.0 million. The Partnership paid cash consideration of $131.6 million, the purchase price net of an initial purchase price adjustment of $0.4 million, which was paid in part to Enviva Development and in part to satisfy certain payment obligations of Greenwood Holdings II. Pursuant to the contribution of Greenwood Holdings II, Enviva Holdings assigned to the Partnership certain of its rights and obligations under certain off-take and shipping contracts.
The outbreak and spread of a novel strain of coronavirus (“COVID-19”) has adversely impacted global commercial activity and contributed to significant declines and volatility in the financial markets. The Company has not experienced any material impact to its business from COVID-19 and does not expect that COVID-19 will have a material impact on its business or operations.
