Enviva (EVVAQ) 10-Q2020 Q3 Quarterly report

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q (this “Quarterly Report”) may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. Although management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

Please read the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 and the risk factors included herein in Item 1A. Risk Factors. All forward-looking statements in this Quarterly Report are expressly qualified in their entirety by the foregoing cautionary statements.

Readers are cautioned not to place undue reliance on forward-looking statements and we undertake no obligation to update or revise any such statements after the date they are made, whether as a result of new information, future events or otherwise.

GLOSSARY OF TERMS

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

Description of Business

Enviva Partners, LP, together with its subsidiaries (“we,” “us,” “our” or the “Partnership”) supplies utility-grade wood pellets primarily to major power generators under long-term, take-or-pay off-take contracts. We procure wood fiber and process it into utility-grade wood pellets and load the finished wood pellets into railcars, trucks and barges for transportation to deep-water marine terminals, where they are received, stored and ultimately loaded onto oceangoing vessels for delivery under long-term, take-or-pay off-take contracts to our customers principally in the United Kingdom (the “U.K.”), Europe and increasingly Japan.

We own and operate 9 industrial-scale wood pellet production plants located in the Mid-Atlantic and Gulf Coast regions of the United States. In addition to the volumes from our plants, we also procure wood pellets from third parties. Wood pellets are exported from our wholly owned deep-water marine terminal at the Port of Chesapeake, Virginia and terminal assets at the Port of Wilmington, North Carolina (the “Wilmington terminal”) and from third-party deep-water marine terminals in Mobile, Alabama, Panama City, Florida and Savannah, Georgia under a short-term contract, a long-term contract and a lease and associated terminal services agreement, respectively.

Basis of Presentation

The unaudited financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments and accruals necessary for a fair presentation have been included. All such adjustments and accruals are of a normal and recurring nature unless disclosed otherwise. All intercompany balances and transactions have been eliminated in consolidation. The results reported in the financial statements are not necessarily indicative of the results that may be reported for the entire year.

The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Certain prior year amounts have been reclassified from general and administrative expenses to related-party management services agreement fees to conform to current period presentation on the condensed consolidated statements of operations.

On July 1, 2020, we acquired from Enviva Holdings, LP (together with Enviva MLP Holdco, LLC and Enviva Development Holdings, LLC, where applicable, our “sponsor”), all of the limited liability company interests in Enviva Pellets Greenwood Holdings II, LLC (“Greenwood Holdings II”), the indirect owner of Enviva Pellets Greenwood, LLC, which owns a wood pellet production plant located in Greenwood, South Carolina (the “Greenwood plant”), for a purchase price of $132.0 million, subject to certain adjustments (such transaction, the “Greenwood Drop-Down”). In connection therewith, our sponsor assigned five biomass off-take contracts to us (collectively, the “Associated Off-Take Contracts”). The Associated Off-Take Contracts call for aggregate annual deliveries of 1.4 million metric tons per year (“MTPY”) and mature between 2031 and 2041. Our sponsor also assigned two fixed-rate shipping contracts and partially assigned two additional fixed-rate shipping contracts to us.

On the date of the Greenwood Drop-Down:

On July 31, 2020, Enviva Pellets Waycross Holdings, LLC, a wholly owned subsidiary of the Partnership, acquired all of the limited liability company interests in Georgia Biomass Holding LLC, a Georgia limited liability company (“Georgia Biomass”), and the indirect owner of a wood pellet production plant located in Waycross, Georgia (the “Waycross plant”), for a purchase price of $175.0 million, subject to certain adjustments (the “Georgia Biomass Acquisition”). The Waycross plant has been in operation since 2011 and has a production capacity of approximately 800,000 MTPY. The Waycross plant terminals its production at a two-dome pellet export terminal with a storage capacity of 50,000 MT at the Port of Savannah, Georgia pursuant to a lease and associated terminal services agreement through 2028. Approximately 500,000 MTPY of the Waycross plant’s production is contracted under separate agreements to an existing customer of the Partnership through 2024. In August 2020, Georgia Biomass converted to a limited liability company organized under the laws of the State of Delaware under the name Enviva Pellets Waycross Holdings Sub, LLC (“Waycross”).

On April 2, 2019, we acquired from our sponsor all of the issued and outstanding Class B Units in Enviva Wilmington Holdings, LLC (the “Hamlet JV”), a limited liability company owned by our sponsor and John Hancock Life Insurance Company (U.S.A.) and certain of its affiliates (collectively, as applicable, “John Hancock”). On the date of acquisition (the “Hamlet Drop-Down”), we began to consolidate the Hamlet JV as a variable interest entity of which we are the primary beneficiary. As managing member, we have the sole power to direct the activities that most impact the economics of the Hamlet JV. Additionally, as the Class B Units represent a controlling interest in the Hamlet JV, we account for the Hamlet JV as a consolidated subsidiary, not as a joint venture. The Hamlet JV owns a wood pellet production plant in Hamlet, North Carolina (the “Hamlet plant”) and a firm, 15-year take-or-pay off-take contract with a customer for the delivery of nearly 1.0 million MTPY of wood pellets, following a ramp period. The Hamlet Drop-Down was an asset acquisition of entities under common control and accounted for on the carryover basis of accounting. Accordingly, the consolidated financial statements for the period beginning April 2019 reflect the acquisition.

During interim periods, we follow the accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

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

Intangibles

Income taxes

Substantially all of our operating subsidiaries are organized as limited partnerships and entities that are disregarded entities for U.S. federal and state income tax purposes. As a result, those entities disregarded for U.S. federal and state income tax purposes are not subject to U.S. federal and most state income taxes. Our partners and unitholders are liable for these income taxes on their share of our taxable income. Some states impose franchise and capital taxes on the Partnership. Such taxes are not material to the consolidated financial statements and have been included in other income (expense) as incurred.

One of our subsidiaries formed in connection with the Georgia Biomass Acquisition is subject to U.S. federal income tax and accounts for income tax under the liability method. Deferred taxes are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of any tax rate change on deferred taxes is recognized in the period that includes the enactment date of the tax rate change. Realization of deferred tax assets is assessed on an annual basis and, if not more likely than not, any deferred tax assets can be utilized and a valuation allowance is recorded to write down the deferred tax assets to their net realizable value.

Recently Adopted Accounting Standards

Recently Issued Accounting Standards not yet Adopted

Currently, there are no recently issued accounting standards not yet adopted by us that we expect to be reasonably likely to materially impact our financial position, results of operations or cash flows.

Enviva Pellets Greenwood Holdings II, LLC

The Greenwood Drop-Down closed on July 1, 2020 and was an asset acquisition of entities under common control where the financial statements of the receiving entity reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control. Accordingly, the consolidated financial statements for the period beginning July 1, 2020 reflect the Greenwood Drop-Down. The $132.0 million purchase price for the Greenwood Drop-Down consisted of a cash payment of $129.7 million, net of a purchase price adjustment of $2.3 million.

The change in net assets on July 1, 2020 from the Greenwood Drop-Down included $67.8 million of net assets acquired. The following table outlines the changes in consolidated net assets resulting from the Greenwood Drop-Down on July 1, 2020.

The unaudited pro forma combined revenue and net income presented below have been prepared as if the Greenwood Drop-Down had occurred on January 1, 2019. The unaudited pro forma financial information has been derived from the consolidated statements of operations of the Partnership and Greenwood for the below periods. The historical financial information has been adjusted in the unaudited combined pro forma information to give effect to pro forma events that are (1) directly attributable to the Greenwood Drop-Down, (2) factually supportable and (3) expected to have a continuing impact on our results of operations following the Greenwood Drop-Down. The unaudited pro forma financial information does not include non-recurring items such as transaction costs related to the acquisition. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Greenwood Drop-Down had taken place on January 1, 2019.

The unaudited pro forma combined revenue and net loss for the nine months ended September 30, 2020 and for the year ended December 31, 2019 are as follows:

Enviva Wilmington Holdings, LLC

The $165.0 million purchase price for the Hamlet Drop-Down in April 2019 consisted of (1) an initial cash payment of $24.7 million, net of a purchase price adjustment of $0.3 million, (2) the issuance of 1,681,237 unregistered common units at a value of $29.74 per unit, or $50.0 million of common units, (3) $50.0 million in cash, paid on June 28, 2019 and (4) a third and final cash payment of $40.0 million paid on January 2, 2020.

We are responsible for managing the activities of the Hamlet JV, including the development, construction and operation of the Hamlet plant and are the primary beneficiary of the Hamlet JV. We included all accounts of the Hamlet JV in our consolidated results as of the date of the Hamlet Drop-Down as the Class B Units represent a controlling interest in the Hamlet JV and we are generally unrestricted in managing the assets and cash flows of the Hamlet JV; however, certain decisions, such as those relating to the issuance and redemption of equity interests in the Hamlet JV, guarantees of indebtedness and fundamental changes, including mergers and acquisitions, asset sales and liquidation and dissolution of the Hamlet JV, require the approval of the members of the Hamlet JV.

The Georgia Biomass Acquisition closed on July 31, 2020 for a total purchase price of $175.0 million, subject to certain adjustments. After accounting for certain adjustments, we paid $168.3 million, subject to further adjustment. The Georgia Biomass Acquisition diversifies our manufacturing and export terminaling footprint and expands our operations into a new region with similarly advantaged low-cost access to wood fiber.

Preliminary Purchase Price Allocation

The purchase price allocation for the Georgia Biomass Acquisition is preliminary. The assets acquired and liabilities assumed have been measured on a preliminary basis using assumptions that are reasonable based on information currently available. The final purchase price allocation may vary based on final valuations and analyses of the fair value of the assets acquired and liabilities assumed.

The Georgia Biomass Acquisition was accounted for as a business combination using the acquisition method of accounting. The following table summarizes the estimated purchase price and the estimated fair values of the amounts recorded for identifiable assets acquired and liabilities assumed at July 31, 2020, the acquisition date:

The net assets of Georgia Biomass were recorded as provisional amounts at their currently estimated fair values. Significant inputs used to estimate the fair values of certain net assets acquired included estimates of the: (1) replacement cost for property, plant and equipment as if each asset was new as of the acquisition date, which was then adjusted for the depreciation and any obsolescence since the date Georgia Biomass originally acquired that asset; (2) market prices for finished goods inventory and for customer and shipping contracts; (3) incremental borrowing rates as of the acquisition date for leases acquired; and (4) appropriate discount rates. We are in the process of obtaining additional information to identify and measure all assets acquired and liabilities assumed in the Georgia Biomass Acquisition within the measurement period, which could be up to one year from the date of acquisition. Such provisional amounts will be retrospectively adjusted to reflect any new information about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of these amounts. Additionally, key valuation inputs and their sensitivity to the valuation of assets acquired and liabilities assumed are currently being reviewed by management. As the valuation of the net assets acquired are finalized, it is reasonably possible that the provisional amounts recorded as of the acquisition date for property, plant and equipment, intangible assets and liabilities, lease-related assets and obligations, deferred taxes, and goodwill may change during the measurement period.

Goodwill is calculated as the excess of the fair value of the consideration transferred over the fair value of the net assets recognized and represents the future economic benefits arising from other net assets acquired that could not be individually identified and separately recognized. We believe that the primary items that generated goodwill include both (1) the value of the synergies created between the acquired assets and our pre-existing assets and long-term, take-or-pay off-take contracts and (2) our expected ability to grow the combined business by leveraging the combined business experience and the expanded footprint. None of the goodwill is expected to be deductible for tax purposes.

In connection with the Georgia Biomass Acquisition, acquisition-related costs through September 30, 2020 are approximately $3.9 million, of which $3.6 million was expensed during the three and nine months ended September 30, 2020 and included within general and administrative expenses on the condensed consolidated statements of operations. These acquisition-related costs do not include integration costs.

Post-acquisition and pro forma financial information

The condensed consolidated statements of operations for the three and nine months ended September 30, 2020 include $26.5 million of revenue and $0.1 million of net income from the Georgia Biomass Acquisition since July 31, 2020.

The unaudited pro forma combined revenue and net income presented below have been prepared as if the Georgia Biomass Acquisition had occurred on January 1, 2019. The unaudited pro forma financial information has been derived from the consolidated statements of operations of the Partnership for the below periods and from the consolidated abbreviated statements of revenues and direct expenses of Georgia Biomass for the six months ended June 30, 2020 and the year ended December 31, 2019. The abbreviated statements of revenues and direct expenses of Georgia Biomass were prepared for the purposes of complying with the requirements of Rule 3-05 of Regulation S-X as no separate financial statements of Georgia Biomass had previously been prepared. The abbreviated statements of revenues and direct expenses of Georgia Biomass include the revenues and direct expenses directly attributable to manufacturing and distributing wood pellets to customers in the United Kingdom and Europe by Georgia Biomass.

The unaudited pro forma financial information reflects the effects of applying certain preliminary purchase price accounting adjustments to the historical financial information based on the fair value of the identified net assets acquired as of July 31, 2020. The historical financial information has been adjusted in the unaudited pro forma information to give effect to pro forma events that are (1) directly attributable to the Georgia Biomass Acquisition, (2) factually supportable and (3) expected to have a continuing impact on our results of operations following the Georgia Biomass Acquisition. The unaudited pro forma financial information does not include non-recurring items such as transaction costs related to the acquisition. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Georgia Biomass Acquisition had taken place on January 1, 2019.

The unaudited pro forma combined revenue and net income for the nine months ended September 30, 2020 and for the year ended December 31, 2019 are as follows:

We disaggregate our revenue into two categories: product sales and other revenue. Product sales includes sales of wood pellets. Other revenue includes fees associated with customer requests to cancel, defer or accelerate shipments in satisfaction of the related performance obligation and third- and related-party terminal services fees. Other revenue also includes fees received for other services, including for sales and marketing, scheduling, sustainability, consultation, shipping and risk management services, where the revenue is recognized when we both have satisfied the performance obligation and have a right to the corresponding fee. These categories best reflect the nature, amount, timing and uncertainty of our revenue and cash flows.

Performance Obligations

As of September 30, 2020, the aggregate amount of revenues from contracts with customers allocated to performance obligations that were unsatisfied or partially satisfied was approximately $14.6 billion. This amount excludes forward prices

As of October 1, 2020, we expect to recognize approximately 2.0% of our remaining performance obligations as revenue during the remainder of 2020, approximately 7.0% in 2021 and the balance thereafter. Our off-take contracts expire at various times through 2043 and our terminal services contracts extend into 2021.

Additionally, as of October 1, 2020, we have obligations under other contracts to sell and purchase wood pellets of $259.5 million and $187.8 million, respectively.

Variable Consideration

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

Variable consideration from terminal services contracts, which was none for the three and nine months ended September 30, 2020 and insignificant for the three and nine months ended September 30, 2019, arises from price increases based on agreed inflation indices and from above-minimum throughput quantities or services.

We allocate variable consideration under our off-take and terminal services contracts entirely to each performance obligation to which variable consideration relates. The estimate of variable consideration represents the amount that is not more likely than not to be reversed. For the three months ended September 30, 2020, revenue was reduced by $0.1 million related to performance obligations satisfied in previous periods. For the nine months ended September 30, 2020, we recognized $0.1 million of revenue related to performance obligations satisfied in previous periods. For the three and nine months ended September 30, 2019 we recognized $0.1 million and $0.5 million, respectively, of revenue related to performance obligations satisfied in previous periods.

Contract Balances

Accounts receivable related to product sales as of September 30, 2020 and December 31, 2019 were $78.4 million and $67.7 million. As of September 30, 2020, we had 0 deferred revenue for future performance obligations associated with off-take contracts. As of December 31, 2019, we had $4.1 million of deferred revenue for future performance obligations associated with off-take contracts.

Other

Accrued and other current liabilities included approximately $12.2 million and $7.6 million at September 30, 2020 and December 31, 2019 for amounts associated with purchased shipments from third-party suppliers that were resold in back-to-back transactions.

Our business is significantly impacted by greenhouse gas emission and renewable energy legislation and regulations in the U.K., European Union (“EU”) as well as its member states and Japan. If the U.K., the EU or its member states or Japan significantly modify such legislation or regulations, then our ability to enter into new contracts as our existing contracts expire may be materially affected.

Our current product sales are primarily to industrial customers located in the U.K., Denmark and Belgium. Product sales to third-party customers that accounted for 10% or a greater share of consolidated product sales are as follows:

Inventories consisted of the following as of:

Property, plant and equipment consisted of the following as of:

For the three and nine months ended September 30, 2020, total depreciation expense was $18.8 million and $48.0 million, respectively. For the three and nine months ended September 30, 2019, total depreciation expense was $13.3 million and $35.8 million, respectively. For the three and nine months ended September 30, 2020, total interest capitalized related to construction in progress was $1.7 million and $4.1 million, respectively. For the three and nine months ended September 30, 2019, total interest capitalized related to construction in progress was $0.7 million and $1.4 million, respectively. At September 30, 2020 and December 31, 2019, accrued amounts for property, plant and equipment and construction in progress included in accrued and other current liabilities were $12.0 million and $9.4 million, respectively.

Goodwill

Intangibles

Intangible assets (liabilities) consisted of the following at September 30, 2020:

The Greenwood Drop-Down included an intangible asset of assembled workforce. As a result of the Georgia Biomass Acquisition, we recorded intangible assets and liabilities related to favorable off-take contracts that expire in 2020, unfavorable customer contracts that expire in December 2025 and an unfavorable shipping contract that expires in December 2026. During the three and nine months ended September 30, 2020, $1.8 million of net amortization expense was included in depreciation and amortization on the condensed consolidated statements of operations.

The estimated aggregate net increase in (reduction of) amortization expense for the next five years are as follows:

We have operating and finance leases related to real estate, machinery, equipment and other assets where we are the lessee. Leases with an initial term of 12 months or less are not recorded on the balance sheet but are recognized as lease expense on a straight-line basis over the applicable lease terms. Leases with an initial term of longer than 12 months are recorded on the balance sheet and classified as either operating or finance.

Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our leases do not contain any material residual value guarantees, restrictive covenants or subleases. In addition to fixed lease payments, we have contracts that incur variable lease expense related to usage (e.g. throughput fees, maintenance and repair and machine hours), which are expensed as incurred. Our leases have remaining terms of one to 27 years, some of which include options to extend the leases for up to five years. Our leases are generally noncancelable. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

We apply an incremental borrowing rate to our leases for balance sheet measurement. As most of our leases do not provide an implicit rate, we generally use the estimated rate of interest for a collateralized borrowing over a similar term of the lease payments at the lease commencement date as our incremental borrowing rate.

Operating leases are included in operating lease ROU assets, accrued and other current liabilities and long-term operating lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, current portion of long-term debt and finance lease obligations and long-term debt and finance lease obligations on our condensed consolidated balance sheets. Changes in ROU assets and operating lease liabilities are included net in change in operating lease liabilities on the condensed consolidated statements of cash flows.

Operating lease ROU assets and liabilities and finance leases were as follows:

Operating and finance lease costs were as follows:

Operating and finance lease cash flow information was as follows:

The future minimum lease payments and the aggregate maturities of operating and finance lease liabilities are as follows as of September 30, 2020:

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 September 30, 2020:

We use derivative instruments to partially offset our business exposure to foreign currency exchange and interest rate risk.

We may enter into foreign currency forward and option contracts to offset some of the foreign currency exchange risk on expected future cash flows and interest rate swaps to offset some of the interest rate risk on expected future cash flows on certain borrowings. The preponderance of our off-take contracts are US Dollar-denominated. We are primarily exposed to fluctuations in foreign currency exchange rates related to off-take contracts that require future deliveries of wood pellets to be settled in British Pound Sterling (“GBP”) and Euro (“EUR”) in the minority of our contracts that are not denominated in US Dollars. Our derivative instruments expose us to credit risk to the extent that hedge counterparties may be unable to meet the terms of the applicable derivative instrument. We seek to mitigate such risks by limiting our counterparties to major financial institutions. In addition, we monitor the potential risk of loss with any one counterparty resulting from credit risk. Management does not expect

We entered into pay-fixed, receive-variable interest rate swaps that expire in September 2021 and October 2021 to hedge interest rate risk associated with our variable rate borrowings under our senior secured revolving credit facility that are not designated and accounted for as cash flow hedges.

Derivative instruments are classified as Level 2 assets or liabilities based on inputs such as spot and forward benchmark interest rates (such as LIBOR) and foreign exchange rates. The fair value of derivative instruments not designated as hedging instruments at September 30, 2020 and December 31, 2019 was as follows:

Unrealized losses related to the change in fair market value of interest rate swaps are recorded in interest expense and were insignificant and $0.2 million for the three and nine months ended September 30, 2020. Our interest rate swap outstanding at and during the three and nine months ended September 30, 2019 was designated as a hedging instrument.

Net unrealized losses related to the change in fair market value of foreign currency derivatives were $2.6 million during the three months ended September 30, 2020 and were included in product sales. Net unrealized gains related to the change in fair market value of foreign currency derivatives were $4.1 million during the nine months ended September 30, 2020 and were included in product sales. Net unrealized gains related to the change in fair market value of foreign currency derivatives were $1.1 million and $1.4 million during the three and nine months ended September 30, 2019, respectively, and were included in product sales.

Realized gains related to derivatives settled were $0.1 million and $0.3 million during the three and nine months ended September 30, 2020, respectively, and were included in product sales. Realized gains related to derivatives settled were $1.6 million and $1.7 million during the three and nine months ended September 30, 2019, respectively, and were included in product sales.

We enter into master netting arrangements designed to permit net settlement of derivative transactions among the respective counterparties. If we had settled all transactions with our respective counterparties at September 30, 2020, we would have received a net settlement termination payment of $3.6 million, which is $0.1 million less than the recorded fair value of the derivatives. We present our derivative assets and liabilities at their gross fair values.

The notional amounts of outstanding derivative instruments associated with outstanding or unsettled derivative instruments as of September 30, 2020 and December 31, 2019 were as follows:

The amounts reported in the unaudited condensed consolidated balance sheets as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, related-party receivables, net, related-party payables, net, and accrued and other current liabilities approximate fair value because of the short-term nature of these instruments.

Derivative instruments and long-term debt and finance lease obligations, including the current portion, are classified as Level 2 instruments. The fair value of our senior notes was determined based on observable market prices in a less active market and was categorized as Level 2 in the fair value hierarchy. The fair value of other long-term debt and finance lease obligations classified as Level 2 was determined based on the usage of market prices not quoted on active markets and other observable market data. The fair value of the long-term debt and finance lease obligations are based upon rates currently available for debt and finance lease obligations with similar terms and remaining maturities. The carrying amount of derivative instruments approximates fair value.

The carrying amount and estimated fair value of long-term debt and finance lease obligations as of September 30, 2020 and December 31, 2019 were as follows:

Long-term debt and finance lease obligations at carrying value are composed of the following:

2026 Notes

In December 2019, we issued $600.0 million in principal amount of 6.5% senior unsecured notes due January 15, 2026 (the “2026 Notes”). In July 2020, we issued an additional $150.0 million aggregate principal amount of the 2026 Notes at an offering price of 103.75% of the principal amount (the “Additional Notes”). We received net proceeds of approximately $153.6 million from the Additional Notes offering after deducting discounts and commissions. We used the net proceeds from the Additional Notes offering to fund a portion of the cash consideration for the Georgia Biomass Acquisition and the Greenwood Drop-Down, to repay borrowings under our revolving credit facility and for general partnership purposes.

As of September 30, 2020 and December 31, 2019, we were in compliance with all covenants and restrictions associated with, and no events of default existed under, the indenture dated as of December 9, 2019 governing the 2026 Notes. The 2026 Notes are guaranteed jointly and severally on a senior unsecured basis by our existing subsidiaries (excluding Enviva Partners Finance Corp.) that guarantee certain of our indebtedness and may be guaranteed by certain future restricted subsidiaries.

Senior Secured Revolving Credit Facility

Seller Note

In connection with the Greenwood Drop-Down, we became a party to, and a guarantor of, a promissory note (the “Seller Note”) with a remaining principal balance of $40.0 million, which was initially recorded at its carrying value of $36.9 million. The Seller Note matures in February 2023 and has an interest rate of 2.5% per annum. Principal and related interest payments are due annually beginning February 2018 through February 2022 and quarterly thereafter.

Related-party amounts included on the unaudited condensed consolidated statements of operations were as follows:

Management Services Agreements

Enviva Partners, LP and the Hamlet JV are parties to management services agreements (together, the “MSAs”) with Enviva Management. Enviva Management provides us with operations, general administrative, management and other services. We reimburse Enviva Management for all direct or indirect internal or third-party expenses it incurs in connection with the provision of such services. The MSAs include rent-related amounts for noncancelable operating leases for office space in Maryland and North Carolina held by our sponsor.

Under the Hamlet JV’s management services agreement (the “Hamlet JV MSA”), the Hamlet JV pays an annual management fee to Enviva Management and to the extent allocated costs exceed the annual management fee, the additional costs are recorded with an increase to partners’ capital. In connection with the Hamlet Drop-Down, Enviva Management waived the Hamlet JV’s obligation to pay approximately $2.7 million of management fees payable to Enviva Management from the date thereof until July 1, 2020 (the “Hamlet JV MSA Fee Waiver”).

Related-party amounts included on the unaudited condensed consolidated balance sheets under our MSAs were as follows:

Related-party amounts included on the unaudited condensed consolidated statements of operations under our MSAs were as follows:

During the three and nine months ended September 30, 2020, $0.2 million and $1.5 million, respectively, of fees expensed under the Hamlet JV MSA were waived pursuant to the Hamlet JV MSA Fee Waiver and recorded as an increase to partners’ capital. During the three and nine months ended September 30, 2019, $0.8 million and $1.7 million, respectfully, of fees expensed under the Hamlet JV MSA were waived pursuant to the Hamlet JV MSA Fee Waiver and recorded as an increase to partners’ capital.

Drop-Down Agreements

Pursuant to the Third EVA MSA Fee Waiver, during the three and nine months ended September 30, 2020, $9.0 million was recorded as an increase to partners’ capital consisting of expenses waived under the agreement.

On the date of the Hamlet Drop-Down:

For the three months ended September 30, 2020, we did not record any amounts related to the Hamlet Make-Whole Agreement, First EVA MSA Waiver and ISA as they expired pursuant to their terms on June 30, 2020. For the nine months ended

Second EVA MSA Fee Waiver

In June 2019, we entered into an agreement with Enviva Management (the “Second EVA MSA Fee Waiver”) pursuant to which we received a $5.0 million waiver of fees under the EVA MSA through September 30, 2019 as consideration for an assignment of two shipping contracts to our sponsor to rebalance our and our sponsor’s respective shipping obligations under our existing off-take contracts. During the three and nine months ended September 30, 2019, $2.3 million and $5.0 million, respectively, of EVA MSA fees expensed were waived and recorded as an increase to partners’ capital pursuant to the Second EVA MSA Fee Waiver.

Greenwood Contract

We were a party to a contract with Greenwood to purchase wood pellets produced by the Greenwood plant through March 2022 (the “Greenwood contract”) and had a take-or-pay obligation with respect to 550,000 MTPY of wood pellets from July 2019 through March 2022, subject to Greenwood’s option to increase or decrease the volume by 10% each contract year. Pursuant to amendments to the Greenwood Contract, our take-or-pay obligation with respect to 550,000 MTPY of wood pellets was deferred to 2021. The Greenwood Contract was terminated on the date of the Greenwood Drop-Down.

During the nine months ended September 30, 2020, we purchased $18.8 million of wood pellets from Greenwood and recorded a cost of cover deficiency fee of approximately $0.3 million from Greenwood. During the three and nine months ended September 30, 2019, we purchased $11.3 million and $35.5 million, respectively, of wood pellets from Greenwood and recorded a cost of cover deficiency fee of approximately $1.0 million and $4.3 million, respectively, from Greenwood as it was unable to satisfy certain commitments.

As of September 30, 2020, the net purchased amount of $18.1 million related to the Greenwood contract was included in cost of goods sold. As of September 30, 2019, the net purchased amount of $31.2 million related to the Greenwood contract included $29.7 million in cost of goods sold and $1.5 million in finished goods inventory.

Holdings TSA

We were party to a long-term terminal services agreement with our sponsor (the “Holdings TSA”) effective until September 1, 2026. Pursuant to the Holdings TSA, our sponsor agreed to deliver a minimum of 125,000 MT of wood pellets per quarter for receipt, storage, handling and loading services by the Wilmington terminal and pay a fixed fee on a per-ton basis for such terminal services.

The Holdings TSA was amended and assigned to Greenwood and provided for deficiency payments to Wilmington if quarterly minimum throughput requirements were not met. During the nine months ended September 30, 2020, we recorded $1.3 million of deficiency fees from Greenwood, which are included in other revenue. We did not record deficiency fees from Greenwood during the three months ended September 30, 2020. During the three and nine months ended September 30, 2019, we recorded $0.5 million and $1.3 million, respectively, of deficiency fees from Greenwood, which are included in other revenue. The Holdings TSA was terminated on the date of the Greenwood Drop-Down.

Enviva FiberCo, LLC

Issuance of Common Units

Allocations of Net Income

Our partnership agreement contains provisions for the allocation of net income and loss to our unitholders and Enviva Partners GP, LLC (“General Partner”), a wholly owned subsidiary of our sponsor. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners of the Partnership in accordance with their respective percentage ownership interest. Such allocations are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions, which are allocated 100% to the General Partner.

Prior to the Hamlet Drop-Down, John Hancock had received all of its capital contributions and substantially all of its preference amount and the historical net losses of the Hamlet JV had been allocated to the members of the Hamlet JV in proportion to their unreturned capital contributions; consequently, the balance of members’ capital attributable to John Hancock was negative at the time of the Hamlet Drop-Down. We have not received repayment of revolving borrowings from the Hamlet JV pursuant to the Hamlet JV Revolver or its capital contributions and full preference amount as of September 30, 2020; as a result, none of the earnings of the Hamlet JV have been allocated to John Hancock following the Hamlet Drop-Down and no change has been recognized to the negative noncontrolling interest balance attributable to John Hancock that we acquired.

Incentive Distribution Rights

Incentive distribution rights (“IDRs”) represent the right to receive increasing percentages (from 15.0% to 50.0%) of quarterly distributions from operating surplus after we achieve distributions in amounts exceeding specified target distribution levels. Our General Partner currently holds the IDRs, but may transfer them at any time.

Cash Distributions to Unitholders

Distributions that have been paid or declared related to the reporting period are considered in the determination of earnings per unit. The following table details the cash distribution paid or declared (in millions, except per-unit amounts):