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GLOBAL PARTNERS LP 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the quarterly period ended September 30, 2012

 

 

 

 

 

 

 

OR

 

 

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the transition period from              to              

 

 

Commission file number 001-32593

 

Global Partners LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-3140887

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

P.O. Box 9161
800 South Street
Waltham, Massachusetts 02454-9161

(Address of principal executive offices, including zip code)

 

(781) 894-8800
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                                                                                                                          Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.                                                                                                                                                                                                Yes x No o

 

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  o

 

Accelerated filer  x

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

‘Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o No x

 

The issuer had 27,430,563 common units outstanding as of November 5, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I.                                      FINANCIAL INFORMATION

 

 

 

 

 

Item 1.                                Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

 

 

 

 

 

Consolidated Statement of Partners’ Equity for the nine months ended September 30, 2012

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Item 2.                                Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Item 3.                                Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

 

Item 4.                                Controls and Procedures

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.                                Legal Proceedings

 

 

 

 

 

Item 1A.                       Risk Factors

 

 

 

 

 

Item 6.                                Exhibits

 

 

 

 

 

SIGNATURES

 

 

 

 

 

INDEX TO EXHIBITS

 

 

 



Table of Contents

 

Item 1.         Financial Statements

 

GLOBAL PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2012

 

 

2011

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,073

 

 

$

4,328

 

Accounts receivable, net

 

680,438

 

 

621,670

 

Accounts receivable—affiliates

 

1,277

 

 

1,776

 

Inventories

 

593,727

 

 

664,144

 

Brokerage margin deposits

 

30,272

 

 

43,935

 

Fair value of forward fixed price contracts

 

30,138

 

 

15,450

 

Prepaid expenses and other current assets

 

62,031

 

 

61,561

 

Total current assets

 

1,398,956

 

 

1,412,864

 

 

 

 

 

 

 

 

Property and equipment, net

 

700,913

 

 

408,850

 

Goodwill

 

29,123

 

 

 

Intangible assets, net

 

64,623

 

 

36,710

 

Other assets

 

13,681

 

 

10,427

 

Total assets

 

$

2,207,296

 

 

$

1,868,851

 

Liabilities and partners’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

704,459

 

 

$

575,776

 

Working capital revolving credit facility—current portion

 

149,081

 

 

62,805

 

Environmental liabilities—current portion

 

4,373

 

 

2,936

 

Trustee taxes payable

 

78,977

 

 

76,523

 

Accrued expenses and other current liabilities

 

59,967

 

 

41,307

 

Obligations on forward fixed price contracts

 

945

 

 

11,707

 

Total current liabilities

 

997,802

 

 

771,054

 

Working capital revolving credit facility—less current portion

 

278,019

 

 

526,095

 

Revolving credit facility

 

422,000

 

 

205,000

 

Environmental liabilities—less current portion

 

46,422

 

 

27,303

 

Other long-term liabilities

 

33,438

 

 

24,110

 

Total liabilities

 

1,777,681

 

 

1,553,562

 

Partners’ equity

 

 

 

 

 

 

Common unitholders (27,430,563 units issued and 27,310,648 outstanding at September 30, 2012 and 21,580,563 units issued and 21,561,931 outstanding at December 31, 2011)

 

448,799

 

 

336,103

 

General partner interest (0.83% and 1.06% interest with 230,303 equivalent units outstanding at September 30, 2012 and December 31, 2011, respectively)

 

(474

)

 

(319

)

Accumulated other comprehensive loss

 

(18,710

)

 

(20,495

)

Total partners’ equity

 

429,615

 

 

315,289

 

Total liabilities and partners’ equity

 

$

2,207,296

 

 

$

1,868,851

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per unit data)

(Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Sales

 

$

4,617,194

 

$

3,765,765

 

$

12,508,738

 

$

10,728,985

 

Cost of sales

 

4,534,574

 

3,716,486

 

12,280,124

 

10,578,885

 

Gross profit

 

82,620

 

49,279

 

228,614

 

150,100

 

 

 

 

 

 

 

 

 

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

24,105

 

17,166

 

70,608

 

57,085

 

Operating expenses

 

40,196

 

19,373

 

100,692

 

54,932

 

Restructuring charges

 

 

1,719

 

 

1,719

 

Amortization expense

 

1,511

 

1,216

 

5,373

 

3,583

 

Total costs and operating expenses

 

65,812

 

39,474

 

176,673

 

117,319

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

16,808

 

9,805

 

51,941

 

32,781

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(9,237

)

(7,947

)

(27,705

)

(23,478

)

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

7,571

 

1,858

 

24,236

 

9,303

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(678

)

 

(228

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

6,893

 

1,858

 

24,008

 

9,303

 

 

 

 

 

 

 

 

 

 

 

Less:

General partner’s interest in net income, including incentive distribution rights

 

(316

)

(142

)

(733

)

(455

)

 

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

$

6,577

 

$

1,716

 

$

23,275

 

$

8,848

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

$

0.24

 

$

0.08

 

$

0.89

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per limited partner unit

 

$

0.24

 

$

0.08

 

$

0.89

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

27,311

 

21,567

 

26,085

 

21,188

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

27,485

 

21,752

 

26,258

 

21,388

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,893

 

$

1,858

 

$

24,008

 

$

9,303

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

515

 

(5,193

)

1,204

 

(5,013

)

Change in pension liability

 

373

 

(720

)

581

 

(795

)

Total other comprehensive income (loss)

 

888

 

(5,913

)

1,785

 

(5,808

)

Total comprehensive income (loss)

 

$

7,781

 

$

(4,055

)

$

25,793

 

$

3,495

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

24,008

 

$

9,303

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

32,663

 

22,725

 

Amortization of deferred financing fees

 

4,106

 

3,450

 

Bad debt expense

 

270

 

1,770

 

Stock-based compensation expense

 

(20

)

333

 

Curtailment gain

 

(469

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(40,237

)

112,965

 

Accounts receivable — affiliate

 

499

 

(46

)

Inventories

 

81,839

 

(11,987

)

Broker margin deposits

 

13,663

 

(22,861

)

Prepaid expenses, all other current assets and other assets

 

264

 

(28,107

)

Accounts payable

 

91,708

 

(80,769

)

Trustee taxes payable

 

(7,515

)

(4,044

)

Change in fair value of forward fixed price contracts

 

(25,450

)

(14,226

)

Accrued expenses, all other current liabilities and other long-term liabilities

 

14,371

 

4,715

 

Net cash provided by (used in) operating activities

 

189,700

 

(6,779

)

Cash flows from investing activities

 

 

 

 

 

Acquisition of Alliance (cash component of the purchase price)

 

(181,898

)

 

Capital expenditures

 

(30,907

)

(7,471

)

Proceeds from sale of property and equipment

 

6,610

 

955

 

Net cash used in investing activities

 

(206,195

)

(6,516

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from public offering, net

 

 

69,626

 

(Payments on) borrowings from working capital revolving credit facility

 

(161,800

)

65,300

 

Borrowings from (payments on) revolving credit facility

 

217,000

 

(80,000

)

Repurchase of common units

 

(2,152

)

(658

)

Repurchased units withheld for tax obligations

 

(96

)

(675

)

Distributions to partners

 

(39,712

)

(31,787

)

Net cash provided by financing activities

 

13,240

 

21,806

 

(Decrease) increase in cash and cash equivalents

 

(3,255

)

8,511

 

Cash and cash equivalents at beginning of period

 

4,328

 

2,361

 

Cash and cash equivalents at end of period

 

$

1,073

 

$

10,872

 

Supplemental information

 

 

 

 

 

Cash paid during the period for interest

 

$

27,720

 

$

23,905

 

Non-cash conversion of subordinated unitholders

 

$

 

$

1,623

 

Non-cash investing activities

 

 

 

 

 

Effect of acquisition of Alliance:

 

 

 

 

 

Fair value of tangible assets acquired

 

$

(333,212

)

 

 

Fair value of liabilities assumed

 

83,209

 

 

 

Fair value of acquired intangible assets

 

(33,285

)

 

 

Consideration paid in excess of fair value (goodwill)

 

(29,123

)

 

 

Fair value of common units issued

 

130,513

 

 

 

Net cash paid in connection with the acquisition of Alliance

 

$

(181,898

)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

General

 

Other

 

Total

 

 

 

Common

 

Partner

 

Comprehensive

 

Partners’

 

 

 

Unitholders

 

Interest

 

Loss

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

336,103

 

$

 (319

)

$

(20,495

)

$

315,289

 

Issuance of common units in connection with the acquisition of Alliance

 

130,513

 

 

 

130,513

 

Net income

 

23,275

 

733

 

 

24,008

 

Other comprehensive income

 

 

 

1,785

 

1,785

 

Stock-based compensation

 

(20

)

 

 

(20

)

Distributions to partners

 

(38,907

)

(888

)

 

(39,795

)

Phantom unit dividends

 

83

 

 

 

83

 

Repurchase of common units

 

(2,152

)

 

 

(2,152

)

Repurchased units withheld for tax obligations

 

(96

)

 

 

(96

)

Balance at September 30, 2012

 

$

448,799

 

$

 (474

)

$

(18,710

)

$

429,615

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Organization and Basis of Presentation

 

Organization

 

Global Partners LP (the “Partnership”) is a publicly traded master limited partnership that engages in the distribution of refined petroleum products, renewable fuels, crude oil and natural gas and also provides ancillary services to companies.  The Partnership also receives revenue from retail sales of gasoline, convenience store sales and gas station rental income.

 

On March 1, 2012, the Partnership acquired from AE Holdings Corp. (“AE Holdings”) 100% of the outstanding membership interests in Alliance Energy LLC (“Alliance”) (see Note 2).  Prior to the closing of the acquisition, Alliance was wholly owned by AE Holdings, which is approximately 95% owned by members of the Slifka family. No member of the Slifka family owned a controlling interest in AE Holdings, nor currently owns a controlling interest in Global GP LLC, the Partnership’s general partner (the “General Partner”).  Three independent directors of the General Partner’s board of directors serve on a conflicts committee. The conflicts committee unanimously approved the Alliance acquisition and received advice from its independent counsel and independent financial adviser.

 

As of September 30, 2012, the Partnership had the following subsidiaries:  Global Companies LLC (“Global Companies”), Glen Hes Corp., Global Montello Group Corp. (“GMG”), Alliance Retail LLC, Chelsea Sandwich LLC, Global Energy Marketing LLC (“Global Energy”), Alliance and Bursaw Oil LLC (“Bursaw”) (the subsidiaries, collectively, the “Companies”).  Portside LLC, a former subsidiary, merged into Bursaw in July 2012.  The Companies (other than Glen Hes Corp.) are wholly owned by Global Operating LLC, a wholly owned subsidiary of the Partnership.  In addition, GLP Finance Corp. (“GLP Finance”) is a wholly owned subsidiary of the Partnership.

 

The General Partner, which holds a 0.83% general partner interest in the Partnership, is owned by affiliates of the Slifka family and manages the Partnership’s operations and activities and employs its officers and all of its personnel, except for its gasoline station and convenience store employees and certain union personnel, who are employed by GMG.  As of September 30, 2012, affiliates of the General Partner, including its directors and executive officers, own 11,488,804 common units, representing a 42% limited partner interest.

 

Basis of Presentation

 

The financial results of Alliance for the seven months ended September 30, 2012 are included in the accompanying statements of income for the nine months ended September 30, 2012.  The accompanying consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 reflect the accounts of the Partnership.  All intercompany balances and transactions have been eliminated.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition and operating results for the interim periods.  The interim financial information, which has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), should be read in conjunction with the consolidated financial statements for the year ended December 31, 2011 and notes thereto contained in the Partnership’s Annual Report on Form 10-K.  The significant accounting policies described in Note 2, “Summary of Significant Accounting Policies,” of such Annual Report on Form 10-K are the same used in preparing the accompanying consolidated financial statements.

 

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2012.  The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

6



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation (continued)

 

Due to the nature of the Partnership’s business and its customers’ reliance, in part, on consumer travel and spending patterns, the Partnership may experience more demand for gasoline and gasoline blendstocks during the late spring and summer months than during the fall and winter.  Travel and recreational activities are typically higher in these months in the geographic areas in which the Partnership operates, increasing the demand for gasoline and gasoline blendstocks that the Partnership distributes.  Therefore, the Partnership’s volumes in gasoline and gasoline blendstocks are typically higher in the second and third quarters of the calendar year.  In addition, as demand for some of the Partnership’s refined petroleum products, specifically home heating oil and residual oil for space heating purposes, is generally greater during the winter months, heating oil and residual oil sales are generally higher during the first and fourth quarters of the calendar year.  These factors may result in significant fluctuations in the Partnership’s quarterly operating results.

 

Concentration of Risk

 

The following table presents the Partnership’s product sales as a percentage of total sales for the periods presented:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2012

 

2011

 

2012

 

2011

Gasoline sales:  gasoline and gasoline blendstocks such as ethanol and naphtha

 

76%

 

76%

 

70%

 

68%

Distillates (home heating oil, diesel and kerosene), residual oil, crude oil and natural gas sales

 

24%

 

24%

 

30%

 

32%

Total

 

100%

 

100%

 

100%

 

100%

 

The Partnership had one significant customer, ExxonMobil Oil Corporation (“ExxonMobil”), which accounted for approximately 16% and 18% of total sales for the three months ended September 30, 2012 and 2011, respectively, and approximately 16% and 20% of total sales for the nine months ended September 30, 2012 and 2011, respectively.

 

Note 2.                     Business Combination

 

On March 1, 2012, the Partnership acquired from AE Holdings 100% of the outstanding membership interests in Alliance, a gasoline distributor and operator of gasoline stations and convenience stores.  The aggregate purchase price of the acquisition was approximately $312.4 million, consisting of both cash and non-cash components.  Alliance was an affiliate of the Partnership as Alliance was owned by AE Holdings which is approximately 95% owned by members of the Slifka family.  Both the Partnership and Alliance shared certain common directors.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations.  The Partnership’s financial statements include the results of operations of Alliance subsequent to the acquisition date.

 

The purchase price includes an initial cash payment of $184.5 million which was funded by the Partnership through additional borrowings under its revolving credit facility.  The consideration also includes the issuance of 5,850,000 common units representing limited partner interests in the Partnership which had a fair value of $22.31 per unit on March 1, 2012, resulting in equity consideration of $130.5 million.  Pursuant to the Contribution Agreement, there was a $1.9 million adjustment as a result of the timing of the transaction (March 1), the seller’s 31 days of actual unit ownership in the 91 days of the quarter and the net receipt by seller ($1.0 million) of a pro-rated portion of the quarterly cash distribution of $0.50 per unit paid on the newly issued 5,850,000 common units.  There were also $0.7 million in miscellaneous adjustments based on certain cash and non-cash changes in the Alliance operations from

 

7



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combination (continued)

 

October 1, 2011 (when the acquisition was initially agreed to by the parties) to February 29, 2012 (collectively with the $1.9 million adjustment, the “Cash Adjustment”).  The Cash Adjustment was paid by Alliance to the Partnership on May 16, 2012.  The net cash paid after consideration of the Cash Adjustment was $181.9 million.

 

The following is a summary of the purchase price as of the date of acquisition (in thousands, except units):

 

Number of common units issued

 

5,850,000

 

 

 

Price per common unit on March 1, 2012, date of acquisition

 

$

22.31

 

 

 

Total fair value of common units issued

 

 

 

$

130,513

 

Cash consideration

 

 

 

181,898

 

Total purchase price

 

 

 

$

312,411

 

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including a final valuation of the assets purchased and further information with respect to the fair value of the environmental liabilities assumed.

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Assets purchased:

 

 

 

Accounts receivable

 

$

18,801

 

Inventory

 

11,421

 

Prepaid expenses

 

3,235

 

Property and equipment

 

294,894

 

Intangibles

 

33,285

 

Other non-current assets

 

4,861

 

Total identifiable assets purchased

 

366,497

 

Liabilities assumed:

 

 

 

Accounts payable

 

(36,975

)

Assumption of environmental liabilities

 

(22,000

)

Trustee taxes payable

 

(9,969

)

Accrued expenses

 

(2,211

)

Long-term deferred taxes

 

(6,425

)

Other non-current liabilities

 

(5,629

)

Total liabilities assumed

 

(83,209

)

Net identifiable assets acquired

 

283,288

 

Goodwill

 

29,123

 

Net assets acquired

 

$

312,411

 

 

During the quarter ended September 30, 2012, the Partnership recorded certain changes to the preliminary purchase accounting, primarily related to recording the deferred taxes on the acquisition and, to a lesser extent, changes related to the values assigned to property and equipment and intangibles.  The impact of these changes increased goodwill from $19.6 million at June 30, 2012 to $29.1 million at September 30, 2012.

 

8



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combination (continued)

 

The following represents the changes in goodwill from the period ended June 30, 2012 to the current date.

 

Goodwill – June 30, 2012

 

$

19,659

 

Decrease in fair value of property and equipment

 

1,324

 

Decrease in fair value of intangibles

 

1,715

 

Long-term deferred taxes

 

6,425

 

Goodwill – September 30, 2012

 

$

29,123

 

 

The deferred taxes principally consist of deferred tax assets associated with the environmental obligations and deferred tax liabilities related to the property and equipment.

 

Management is in the process of evaluating the purchase price accounting.  The liability for environmental matters has been estimated by the Partnership with the assistance from a third party consultant.  Based on a preliminary analysis received to date, the estimated provision for environmental matters related to Alliance is $22.0 million.  This provision represents the estimated contingency related to such environmental matters (see Note 11 for additional information).  Upon completion of this analysis, including a review of the legal and environmental requirements related to the remediation costs associated with future removal or replacement of underground gas storage tanks at the Alliance gas station locations, changes may result to the estimated provision for environmental matters.

 

The Partnership engaged a third-party valuation firm to assist in the valuation of Alliance’s property and equipment, and the preliminary estimate of fair value is $294.9 million.  Depreciation expense amounted to $2.5 million and $6.8 million for the three and nine months ended September 30, 2012, respectively.

 

The fair value of $33.3 million assigned to the intangibles was determined based on a preliminary valuation received from a third party.  The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset.  These factors include, in part, a review of the expected use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset.  The Partnership has amortized these intangible assets on a straight-line basis over an estimated useful life of ten years as this approximates the economic use of these assets.  Amortization expense amounted to $0.5 million and $1.9 million for the three and nine months ended September 30, 2012, respectively.

 

The fair values of the remaining Alliance assets and liabilities noted above approximate their carrying values at March 1, 2012.  It is possible that once the Partnership receives the completed valuations on the environmental matters, property and equipment and intangible assets, the final purchase price accounting may be different than what is presented above.

 

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values with the exception of environmental liabilities which were recorded on an undiscounted basis.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon a valuation from an independent third party.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

9



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combination (continued)

 

The $29.1 million of goodwill is expected to be assigned to the Gasoline Distribution and Station Operations segment upon completion of the external valuation.  The goodwill recognized is attributed to the enhancement of the Partnership’s year-round income stream and building on the vertical integration between the Partnership’s supply, teminaling and wholesale business and its portfolio of gas station locations across the northeast.  The goodwill is not expected to be deductible for income tax purposes.

 

The estimated remaining amortization expense for intangible assets acquired in connection with the acquisition for each of the five succeeding years and thereafter is as follows (in thousands):

 

2012 (10/1/12 – 12/31/12)

 

$

832

 

2013

 

3,329

 

2014

 

3,329

 

2015

 

3,329

 

2016

 

3,329

 

Thereafter

 

17,195

 

Total

 

$

31,343

 

 

In connection with the acquisition, the Partnership accrued acquisition related costs of $5.2 million.  Of this amount, $1.1 million was included in selling, general and administrative expenses for the year ended December 31, 2011 and $0 and $4.0 million were included in selling, general and administrative expenses for the three and nine months ended September 30, 2012, respectively.  The Partnership paid acquisition costs of $0.2 million and $3.8 million for the three and nine months ended September 30, 2012, respectively.  At September 30, 2012, $0.2 million of these costs remain accrued and unpaid, and the Partnership expects these remaining costs to be paid by December 31. 2012.

 

Alliance operates a network of company owned and operated gasoline stations and convenience stores and is a distributor of gasoline to leased and independently-owned stations.  Alliance owns and/or operates stations and offers its services in Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey and Pennsylvania.  The acquisition of Alliance has enabled the Partnership to expand its gasoline distribution business and continue to increase its presence across the northeast United States.  The Alliance business is integrated into the Partnership’s Gasoline Distribution and Station Operations reporting segment (see Note 9).

 

Supplemental Pro-Forma Information — The following unaudited pro-forma information presents the consolidated results of operations of the Partnership as if the Alliance acquisition occurred at the beginning of each period presented, with pro-forma adjustments to give effect to intercompany sales and certain other adjustments (in thousands):

 

 

 

Three Months
Ended
September
30,

 

Nine Months Ended
September
30,

 

 

 

2011

 

2012

 

2011

 

Sales

 

$

4,180,141

 

$

12,742,962

 

$

11,940,888

 

Net income

 

$

7,294

 

$

18,264

 

$

17,326

 

Net income per limited partner unit, basic

 

$

0.26

 

$

0.64

 

$

0.62

 

Net income per limited partner unit, diluted

 

$

0.26

 

$

0.64

 

$

0.61

 

 

The pro-forma net income of the Partnership for the nine months ended September 30, 2012 does not reflect the impact of a $4.7 million Alliance receivable that the Partnership deemed to have a fair value of $0 at the acquisition date.  Alliance’s revenues and net income included in the Partnership’s consolidated operating results from March 1, 2012, the acquisition date, through the period ended September 30, 2012 were $1.3 billion and $13.7 million, respectively.

 

10



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Net Income Per Limited Partner Unit

 

Under the Partnership’s partnership agreement, for any quarterly period, the incentive distribution rights (“IDRs”) participate in net income only to the extent of the amount of cash distributions actually declared, thereby excluding the IDRs from participating in the Partnership’s undistributed net income or losses.  Accordingly, the Partnership’s undistributed net income is assumed to be allocated to the common unitholders, or limited partners’ interest, and to the General Partner’s general partner interest.

 

At September 30, 2012 and December 31, 2011, common units outstanding as reported in the accompanying consolidated financial statements excluded 119,915 and 18,632 common units, respectively, held on behalf of the Partnership pursuant to its repurchase program.  These units are not deemed outstanding for purposes of calculating net income per limited partner unit (basic and diluted).

 

The following table provides a reconciliation of net income and the assumed allocation of net income to the limited partners’ interest for purposes of computing net income per limited partner unit for the three and nine months ended September 30, 2012 and 2011 (in thousands, except per unit data):

 

 

 

Three Months Ended September 30, 2012

 

Three Months Ended September 30, 2011

 

Numerator:

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Net income (1)(2)

 

$

 

6,893

 

$

6,577

 

$

316

 

$

 

$

1,858

 

$

1,716

 

$

142

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

15,019

 

14,607

 

122

 

290

 

11,028

 

10,790

 

116

 

122

 

Assumed allocation of undistributed net income

(8,126

)

(8,030

)

(96

)

 

(9,170

)

(9,074

)

(96

)

 

Assumed allocation of net income

$

 

6,893

 

$

6,577

 

$

26

 

$

290

 

$

1,858

 

$

1,716

 

$

20

 

$

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

27,311

 

 

 

 

 

 

 

21,567

 

 

 

 

 

Dilutive effect of phantom units

 

 

174

 

 

 

 

 

 

 

185

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

27,485

 

 

 

 

 

 

 

21,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

$

0.24

 

 

 

 

 

 

 

$

0.08

 

 

 

 

 

Diluted net income per limited partner unit

 

 

$

0.24

 

 

 

 

 

 

 

 

$

0.08

 

 

 

 

 

 

 


(1)            Calculation includes the effect of the March 1, 2012 issuance of 5,850,000 common units in connection with the acquisition of Alliance (see Note 2).  As a result, the general partner interest was reduced to 0.83% for the three months ended September 30, 2012.

(2)            Calculation includes the effect of the November 2010 and February 2011 public offerings.  As a result, the general partner interest was reduced to 1.06% for the three months ended September 30, 2011.

 

11



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Net Income Per Limited Partner Unit (continued)

 

 

 

Nine Months Ended September 30, 2012

 

Nine Months Ended September 30, 2011

 

Numerator:

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Net income (1)(2)

 

$

24,008

 

$

23,275

 

$

733

 

$

 

$

9,303

 

$

8,848

 

$

455

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

43,786

 

42,724

 

358

 

704

 

33,084

 

32,370

 

348

 

366

 

Adjustment to distribution in connection with the Alliance acquisition (3)

(1,929

)

(1,929

)

 

 

 

 

 

 

Adjusted declared distribution

41,857

 

40,795

 

358

 

704

 

33,084

 

32,370

 

348

 

366

 

Assumed allocation of undistributed net income

(17,849

)

(17,520

)

(329

)

 

(23,781

)

(23,522

)

(259

)

 

Assumed allocation of net income

$

24,008

 

$

23,275

 

$

29

 

$

704

 

$

9,303

 

$

8,848

 

$

89

 

$

366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

26,085

 

 

 

 

 

 

 

21,188

 

 

 

 

 

Dilutive effect of phantom units

 

 

173

 

 

 

 

 

 

 

200

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

26,258

 

 

 

 

 

 

 

21,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

$

0.89

 

 

 

 

 

 

 

$

0.42

 

 

 

 

 

Diluted net income per limited partner unit

 

 

$

0.89

 

 

 

 

 

 

 

 

$

0.41

 

 

 

 

 

 


(1)         Calculation includes the effect of the March 1, 2012 issuance of 5,850,000 common units in connection with the acquisition of Alliance (see Note 2).  As a result, the general partner interest was 0.87%, based on a weighted average, for the nine months ended September 30, 2012.

(2)         Calculation includes the effect of the November 2010 and February 2011 public offerings.  As a result, the general partner interest was 1.10%, based on a weighted average, for the nine months ended September 30, 2011.

(3)         In connection with the acquisition of Alliance on March 1, 2012 and the issuance of 5,850,000 common units, the Contribution Agreement provided that any declared per unit distribution for the first quarter of 2012 reflect the seller’s actual period of ownership during that quarter.  The payment by the seller of $1.9 million reflects the timing of the transaction (March 1), the seller’s 31 days of actual unit ownership in the 91 days of the quarter and the net receipt by seller ($1.0 million) of a pro-rated portion of the quarterly cash distribution of $0.50 per unit paid on the newly issued 5,850,000 common units.

 

On April 20, 2012, the board of directors of the General Partner declared a quarterly cash distribution of $0.50 per unit for the period from January 1, 2012 through March 31, 2012.  On July 19, 2012, the board of directors of the General Partner declared a quarterly cash distribution of $0.5250 per unit for the period from April 1, 2012 through June 30, 2012.  On October 25, 2012, the board of directors of the General Partner declared a quarterly cash distribution of $0.5325 per unit for the period from July 1, 2012 through September 30, 2012.  These declared cash distributions resulted in incentive distributions to the General Partner, as the holder of the IDRs, and enabled the Partnership to exceed its first target level distribution with respect to such IDRs.  See Note 8, “Cash Distributions” for further information.

 

12



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4.                     Inventories

 

Except for its convenience store inventory, the Partnership hedges substantially all of its inventory through futures contracts and swap agreements.  Hedges are executed when inventory is purchased and are identified with that specific inventory.  Changes in the fair value of these contracts, as well as the offsetting gain or loss on the hedged inventory item, are recognized in earnings as an increase or decrease in cost of sales.  All hedged inventory is valued using the lower of cost, as determined by specific identification, or market.  Prior to sale, hedges are removed from specific barrels of inventory, and the then unhedged inventory is sold and accounted for on a first-in, first-out basis.  In addition, the Partnership has convenience store inventory which is carried at the lower of historical cost or market.

 

Inventories consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Distillates: home heating oil, diesel and kerosene

 

$

253,835

 

$

393,137

 

Gasoline

 

127,510

 

154,303

 

Gasoline blendstocks

 

106,574

 

57,970

 

Residual oil and crude oil

 

99,330

 

56,121

 

Total

 

587,249

 

661,531

 

Convenience store inventory

 

6,478

 

2,613

 

Total

 

$

593,727

 

$

664,144

 

 

In addition to its own inventory, the Partnership has exchange agreements for petroleum products with unrelated third-party suppliers, whereby it may draw inventory from these other suppliers and suppliers may draw inventory from the Partnership.  Positive exchange balances are accounted for as accounts receivable and amounted to $128.2 million and $65.3 million at September 30, 2012 and December 31, 2011, respectively.  Negative exchange balances are accounted for as accounts payable and amounted to $113.8 million and $58.2 million at September 30, 2012 and December 31, 2011, respectively.  Exchange transactions are valued using current inventory levels.

 

Note 5.                     Derivative Financial Instruments

 

Accounting and reporting guidance for derivative instruments and hedging activities requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure the instruments at fair value.  Changes in the fair value of the derivative are to be recognized currently in earnings, unless specific hedge accounting criteria are met.

 

13



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the volume of activity related to the Partnership’s derivative financial instruments at September 30, 2012:

 

 

 

 

Units (1)

 

Unit of Measure

 

 

 

 

 

 

 

Product Contracts

 

 

 

 

 

Long

 

23,468

 

Thousands of barrels

 

Short

 

(28,943

)

Thousands of barrels

 

 

 

 

 

 

 

Natural Gas Contracts

 

 

 

 

 

Long

 

12,321

 

Thousands of decatherms

 

Short

 

(12,321

)

Thousands of decatherms

 

 

 

 

 

 

 

Interest Rate Collar

 

$

100.0

 

Millions of U.S. dollars

 

 

 

 

 

 

 

Interest Rate Swap

 

$

100.0

 

Millions of U.S. dollars

 

 

 

 

 

 

 

Interest Rate Cap

 

$

100.0

 

Millions of U.S. dollars

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

Open Forward Exchange Contracts (2)

 

$

18.3

 

Millions of Canadian dollars

 

 

 

$

18.6

 

Millions of U.S. dollars

 

 

(1)

 

Number of open positions and gross notional amounts do not quantify risk or represent assets or liabilities of the Partnership, but are used in the calculation of daily cash settlements under the contracts.

(2)

 

All-in forward rate Canadian dollars (“CAD”) $0.9836 to USD $1.00.

 

Fair Value Hedges

 

The fair value of the Partnership’s derivatives is determined through the use of independent markets and is based upon the prevailing market prices of such instruments at the date of valuation.  The Partnership enters into futures contracts related to the receipt or delivery of refined petroleum products, renewable fuels and crude oil in future periods.  The contracts are entered into in the normal course of business to reduce risk of loss of inventory on hand, which could result through fluctuations in market prices.  Changes in the fair value of these contracts, as well as the offsetting gain or loss on the hedged inventory item, are recognized in earnings as an increase or decrease in cost of sales.  Ineffectiveness related to these hedging activities was immaterial for the three and nine months ended September 30, 2012 and 2011.

 

The Partnership also uses futures contracts and swap agreements to hedge exposure under forward fixed price purchase and sale commitments.  These agreements are intended to hedge the impact of commodity price changes on the Partnership’s inventories and forward fixed price commitments as well as to hedge the cost component of virtually all of the Partnership’s forward fixed price purchase and sale commitments.  Changes in the fair value of these contracts and agreements, as well as offsetting gains or losses on the forward fixed price purchase and sale commitments, are recognized in earnings as an increase or decrease in cost of sales.  Gains and losses on net product margin from forward fixed price purchase and sale commitments are reflected in earnings as an increase or decrease in cost of sales as these contracts mature.  The change in the fair value of the futures contracts is settled on a daily basis.  Ineffectiveness related to these hedging activities was immaterial for the three and nine months ended September 30, 2012 and 2011.

 

14



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the gross fair values of the Partnership’s derivative instruments and firm commitments and their location in the Partnership’s consolidated balance sheets at September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

September 30,

 

December 31,

 

 

 

Balance Sheet

 

2012

 

2011

 

Asset Derivatives

 

Location (Net)

 

Fair Value

 

Fair Value

 

Derivatives designated as hedging instruments and firm commitments

 

 

 

 

 

 

 

Product contracts (1)

 

(2)

 

$

29,255

 

$

3,607

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Product and natural gas contracts

 

(3)

 

1,172

 

12,163

 

Foreign currency derivatives

 

(4)

 

121

 

 

Total

 

 

 

1,293

 

12,163

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

30,548

 

$

15,770

 

 

Liability Derivatives

 

 

 

 

 

 

 

Derivatives designated as hedging instruments and firm commitments

 

 

 

 

 

 

 

Product contracts (1)

 

(5)

 

$

93

 

$

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Product and natural gas contracts

 

(5)

 

1,163

 

11,936

 

Total liability derivatives

 

 

 

$

1,256

 

$

11,936

 

 

(1)  Includes forward fixed price purchase and sale contracts as recognized in the Partnership’s consolidated balance sheets at September 30, 2012 and December 31, 2011

(2)  Fair value of forward fixed price contracts and prepaid expenses and other current assets at September 30, 2012 and fair value of forward fixed price contracts at December 31, 2011

(3)  Fair value of forward fixed price contracts and prepaid expenses and other current assets at September 30, 2012 and December 31, 2011

(4)  Prepaid expenses and other current assets at September 30, 2012

(5)  Obligations on forward fixed price contracts and accrued expenses and other current liabilities at September 30, 2012 and December 31, 2011

 

15



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the amount of gains and losses from derivatives involved in fair value hedging relationships recognized in the Partnership’s consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

 

 

Amount of Gain (Loss) Recognized in
Income on Derivatives

 

Derivatives in Fair Value

 

Location of Gain (Loss)
Recognized in

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Hedging Relationships

 

Income on Derivative

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Product contracts

 

Cost of sales

 

$

(100,666

)

$

30,711

 

$

(110,114

)

$

(62,732

)

 

 

 

 

 

Amount of Gain (Loss) Recognized in
Income on Hedged Items

 

Hedged Items in Fair Value

 

Location of Gain (Loss)
Recognized in

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Hedged Relationships

 

Income on Hedged Items

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories and forward fixed price contracts

 

Cost of sales

 

$

100,765

 

$

(30,681

)

$

110,368

 

$

63,030

 

 

The Partnership’s derivative financial instruments do not contain credit risk related to other contingent features that could cause accelerated payments when these financial instruments are in net liability positions.

 

The table below presents the net composition and fair value of forward fixed price purchase and sale contracts on the Partnership’s consolidated balance sheets being hedged by the following derivative instruments (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

Futures contracts

 

$

29,242

 

$

3,607

 

Swaps and other, net

 

(49

)

136

 

Total

 

$

29,193

 

$

3,743

 

 

The net total balances of $29.2 million and $3.7 million reflect the fair value of the forward fixed price contract asset/(liability) net of the corresponding asset/(liability) in the accompanying consolidated balance sheets at September 30, 2012 and December 31, 2011, respectively.

 

The Partnership formally documents all relationships between hedging instruments and hedged items after its risk management objectives and strategy for undertaking the hedge are determined.  The Partnership calculates hedge effectiveness on a quarterly basis.  This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed.  Both at the inception of the hedge and on an ongoing basis, the Partnership assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value of hedged items.  The derivative instruments that qualify for hedge accounting are fair value hedges.

 

The Partnership also markets and sells natural gas.  The Partnership generally conducts business by entering into forward purchase commitments for natural gas only when it simultaneously enters into arrangements for the forward sale of product for physical delivery to third-party users.  Through these transactions, which establish an immediate margin, the Partnership seeks to maintain a position that is substantially balanced between firm forward purchase and sales commitments.  Natural gas is generally purchased and sold at fixed prices and quantities.  Current price quotes from actively traded markets are used in all cases to determine the contracts’ fair value.  Changes in the fair value of these contracts are recognized in earnings as an increase or decrease in cost of sales.

 

16



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The Partnership has a daily margin requirement with its brokers based on the prior day’s market results on open futures contracts.  The brokerage margin balance was $30.3 million and $43.9 million at September 30, 2012 and December 31, 2011, respectively.

 

The Partnership is exposed to credit loss in the event of nonperformance by counterparties of forward purchase and sale commitments, futures contracts, options and swap agreements, but the Partnership has no current reason to expect any material nonperformance by any of these counterparties.  Futures contracts, the primary derivative instrument utilized by the Partnership, are traded on regulated exchanges, greatly reducing potential credit risks.  The Partnership utilizes primarily two clearing brokers, both major financial institutions, for all New York Mercantile Exchange (“NYMEX”) and Chicago Mercantile Exchange (“CME”) derivative transactions and the right of offset exists.  Accordingly, the fair value of derivative instruments is presented on a net basis in the consolidated balance sheets.  Exposure on forward purchase and sale commitments and swap and certain option agreements is limited to the amount of the recorded fair value as of the balance sheet dates.

 

The Partnership generally enters into master netting arrangements to mitigate counterparty credit risk with respect to its derivatives.  Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Partnership to terminate all contracts upon occurrence of certain events, such as a counterparty’s default or bankruptcy.  Because these arrangements provide the right of offset, and the Partnership’s intent and practice is to offset amounts in the case of contract terminations, the Partnership records fair value of derivative positions on a net basis.

 

Cash Flow Hedges

 

The Partnership links all hedges that are designated as cash flow hedges to forecasted transactions.  To the extent such hedges are effective, the changes in the fair value of the derivative instrument are reported as a component of other comprehensive income and reclassified into interest expense or interest income in the same period during which the hedged transaction affects earnings.

 

On September 29, 2008, the Partnership executed a zero premium interest rate collar with a major financial institution.  The collar is designated and accounted for as a cash flow hedge. The collar, which became effective on October 2, 2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthly interest payments made on the Partnership’s $100.0 million one-month LIBOR-based borrowings on the working capital revolving credit facility (and subsequent refinancings thereof) due to changes in the one-month LIBOR rate.  Under the collar, the Partnership capped its exposure at a maximum one-month LIBOR rate of 5.50% and established a minimum floor rate of 2.70%.  As of September 30, 2012, the one-month LIBOR rate of 0.23% was lower than the floor rate.  As a result, the Partnership will remit to the respective financial institution the difference between the floor rate and the current rate which amounted to approximately $185,000 and, at September 30, 2012, such amount was recorded in accrued expenses and other current liabilities in the accompanying consolidated balance sheet.  The fair values of the collar, excluding accrued interest, were liabilities of approximately $2.5 million and $3.8 million as of September 30, 2012 and December 31, 2011, respectively, and were recorded in both other long-term liabilities and accumulated other comprehensive income in the accompanying consolidated balance sheets.  Hedge effectiveness was assessed at inception and is assessed quarterly, prospectively and retrospectively, using regression analysis.  The changes in the fair value of the collar are expected to be highly effective in offsetting the changes in interest rate payments attributable to fluctuations in the one-month LIBOR rate above and below the collar’s strike rates.

 

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GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

In October 2009, the Partnership executed a forward starting interest rate swap with a major financial institution.  The swap, which became effective on May 16, 2011 and expires on May 16, 2016, is used to hedge the variability in interest payments due to changes in the one-month LIBOR swap curve with respect to $100.0 million of one-month LIBOR-based borrowings on the revolving credit facility at a fixed rate of 3.93%.  The fair values of the swap were liabilities of approximately $12.3 million and $12.4 million as of September 30, 2012 and December 31, 2011, respectively, and were recorded in other long-term liabilities and accumulated other comprehensive income in the accompanying consolidated balance sheets.  Hedge effectiveness was assessed at inception and is assessed quarterly, prospectively and retrospectively, using regression analysis.  The changes in the fair value of the swap are expected to be highly effective in offsetting the changes in interest rate payments attributable to fluctuations in the one-month LIBOR swap curve.

 

On April 8, 2011, the Partnership executed an interest rate cap with a major financial institution.  The rate cap, which became effective on April 13, 2011 and expires on April 13, 2016, is used to hedge the variability in interest payments due to changes in the one-month LIBOR rate above 5.5% with respect to $100.0 million of one-month LIBOR-based borrowings on the working capital revolving credit facility.  The fair values of the rate cap were assets of approximately $35,000 and $306,000 as of September 30, 2012 and December 31, 2011, respectively, and were recorded in both other assets and accumulated other comprehensive income in the accompanying balance sheets.  Hedge effectiveness was assessed at inception and is assessed quarterly, prospectively and retrospectively, by (i) comparing the critical terms of the rate cap and the hedged forecasted transactions, (ii) evaluating the counterparty’s ability to honor its obligations under the rate cap agreement; and (iii) ensuring the interest payment cash flows remain probable of occurring.  The changes in the fair value of the rate cap are expected to be highly effective in offsetting the changes in interest rate payments attributable to fluctuations in the one-month LIBOR rate above the rate cap’s strike rate.

 

The following table presents the fair value of the Partnership’s derivative instruments involved in cash flow hedging relationships and their location in the Partnership’s consolidated balance sheets at September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

September 30,

 

December 31,

 

Derivatives Designated as

 

Balance Sheet

 

2012

 

2011

 

Hedging Instruments

 

Location

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

 

 

 

 

 

Interest rate cap

 

Other assets

 

$

35

 

$

306

 

 

 

 

 

 

 

 

 

Liability derivatives

 

 

 

 

 

 

 

Interest rate collar

 

Other long-term liabilities

 

$

2,475

 

$

3,817

 

Interest rate swap

 

Other long-term liabilities

 

12,313

 

12,446

 

Total liability derivatives

 

 

 

$

14,788

 

$

16,263

 

 

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GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the amount of gains and losses from derivatives involved in cash flow hedging relationships recognized in the Partnership’s consolidated statements of income and partners’ equity for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivatives

 

Recognized in Income
on Derivatives
(Ineffectiveness Portion
and Amount Excluded
from Effectiveness
Testing)

 

Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivatives

 

Recognized in Income
on Derivatives
(Ineffectiveness Portion
and Amount Excluded
from Effectiveness
Testing)

 

Derivatives in
Cash Flow

 

Three Months Ended
September 30,

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Hedging Relationship

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate collar

 

$

481

 

$

66

 

$

 

$

 

$

1,341

 

$

1,573

 

$

 

$

 

Interest rate swap

 

78

 

(3,075

)

 

 

133

 

(5,343

)

 

 

Interest rate cap

 

(44

)

(2,184

)

 

 

(270

)

(1,243

)

 

 

Total

 

$

515

 

$

(5,193

)

$

 

$

 

$

1,204

 

$

(5,013

)

$

 

$

 

 

Ineffectiveness related to the interest rate collar and the interest rate swap is recognized as interest expense and was immaterial for the three and nine months ended September 30, 2012 and 2011.  The effective portion related to the interest rate collar that was originally reported in other comprehensive income and reclassified to earnings was $0.6 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively, and $1.9 million and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively.  None of the effective portion related to the interest rate cap that was originally reported in other comprehensive income was reclassified into earnings for the three and nine months ended September 30, 2012 and 2011.

 

Derivatives Not Designated as Hedging Instruments

 

While the Partnership seeks to maintain a position that is substantially balanced within its product purchase activities, it may experience net unbalanced positions for short periods of time as a result of variances in daily sales and transportation and delivery schedules as well as logistical issues inherent in the business, such as weather conditions.  In connection with managing these positions and maintaining a constant presence in the marketplace, both necessary for its business, the Partnership engages in a controlled trading program for up to an aggregate of 250,000 barrels of products at any one point in time.

 

In addition, because a portion of the Partnership’s crude business is conducted in CAD, the Partnership may use foreign currency derivatives to minimize the risks of unfavorable exchange rates.  These instruments include foreign currency exchange contracts and forwards.  In conjunction with entering into the commodity derivative, the Partnership may enter into a foreign currency derivative to hedge the resulting foreign currency risk.  These foreign currency derivatives are generally short-term in nature and not designated for hedge accounting.

 

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GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the amount of gains and losses from derivatives not involved in a hedging relationship recognized in the Partnership’s consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Location of
Gain (Loss)

 

Amount of Gain (Loss)
Recognized in Income
on Derivatives

 

Amount of Gain (Loss)
Recognized in Income
on Derivatives

 

Derivatives Not Designated as

 

Recognized in
Income on

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Hedging Instruments 

 

Derivatives

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Product contracts

 

Cost of sales

 

$

11,062

 

$

6,789

 

$

15,666

 

$

9,116

 

Foreign currency derivatives

 

Cost of sales

 

160

 

 

121

 

 

Total

 

 

 

$

11,222

 

$

6,789

 

$

15,787

 

$

9,116

 

 

Note 6.                     Debt

 

On January 31, 2012, and in connection with the acquisition of Alliance, the Partnership entered into a Fourth Amendment to Amended and Restated Credit Agreement dated May 14, 2010, as amended (the “Credit Agreement”) which increased the total available commitments under the Credit Agreement to $1.4 billion.  The Credit Agreement will mature on May 14, 2014.

 

As of September 30, 2012, there were two facilities under the Credit Agreement:

 

·              a working capital revolving credit facility to be used for working capital purposes and letters of credit in the principal amount equal to the lesser of the Partnership’s borrowing base and $900.0 million; and

 

·              a $500.0 million revolving credit facility to be used for acquisitions and general corporate purposes.

 

In addition, the Credit Agreement has an accordion feature whereby the Partnership may request on the same terms and conditions of its then existing Credit Agreement, provided no Event of Default (as defined in the Credit Agreement) then exists, an increase to the working capital revolving credit facility by up to another $100.0 million, for a total credit facility of up to $1.5 billion.  Any such request for an increase by the Partnership must be in a minimum amount of $5.0 million.  The Partnership cannot provide assurance, however, that its lending group will agree to fund any request by the Partnership for additional amounts in excess of the total available commitments of $1.4 billion.

 

In addition, a swing line has been added to the Credit Agreement pursuant to which Bank of America, N.A., as the swing line lender, may make swing line loans in an aggregate amount equal to the lesser of (a) $35.0 million and (b) the Aggregate WC Commitments (as defined in the Credit Agreement).  Swing line loans will bear interest at the Base Rate (as defined in the Credit Agreement).  The swing line is a sub-portion of the working capital revolving credit facility and is not an addition to the total available commitments of $1.4 billion.

 

Availability under the Partnership’s working capital revolving credit facility is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets.  Under the Credit Agreement, the Partnership’s borrowings under the working capital revolving credit facility cannot exceed the then current borrowing base.  Availability under the Partnership’s borrowing base may be affected by events beyond the Partnership’s control, such as changes in petroleum product prices, collection cycles, counterparty performance, advance rates and limits, and general economic conditions.  These and other events could require the Partnership to seek waivers or amendments of covenants or alternative sources of financing or to reduce expenditures.  The Partnership can provide no assurance that such waivers, amendments or alternative financing could be obtained or, if obtained, would be on terms acceptable to the Partnership.

 

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GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)