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GLOBAL PARTNERS LP 10-Q 2013

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 June 30, 2013

 

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 August 5, 2013.

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I.                          FINANCIAL INFORMATION

 

 

 

 

Item 1.                   Financial Statements

1

 

 

 

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

1

 

 

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012

2

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012

3

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

4

 

 

 

 

Consolidated Statement of Partners’ Equity for the six months ended June 30, 2013

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

 

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

41

 

 

 

 

Item 3.                   Quantitative and Qualitative Disclosures about Market Risk

61

 

 

 

 

Item 4.                   Controls and Procedures

63

 

 

PART II. OTHER INFORMATION

65

 

 

 

Item 1.                   Legal Proceedings

65

 

 

 

 

Item 1A.          Risk Factors

66

 

 

 

 

Item 6.                   Exhibits

66

 

 

 

SIGNATURES

68

 

 

INDEX TO EXHIBITS

69

 



Table of Contents

 

Item 1.   Financial Statements

 

GLOBAL PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,673

 

$

5,977

 

Accounts receivable, net

 

745,846

 

696,762

 

Accounts receivable—affiliates

 

1,400

 

1,307

 

Inventories

 

354,161

 

634,667

 

Brokerage margin deposits

 

21,954

 

54,726

 

Fair value of forward fixed price contracts

 

2,022

 

48,062

 

Prepaid expenses and other current assets

 

45,179

 

65,432

 

Total current assets

 

1,180,235

 

1,506,933

 

 

 

 

 

 

 

Property and equipment, net

 

787,717

 

712,322

 

Goodwill

 

107,579

 

32,326

 

Intangible assets, net

 

128,932

 

60,822

 

Other assets

 

18,832

 

17,349

 

Total assets

 

$

2,223,295

 

$

2,329,752

 

Liabilities and partners’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

764,061

 

$

759,698

 

Working capital revolving credit facility—current portion

 

 

83,746

 

Term loan

 

115,000

 

 

Environmental liabilities—current portion

 

4,286

 

4,341

 

Trustee taxes payable

 

75,789

 

91,494

 

Accrued expenses and other current liabilities

 

50,205

 

71,442

 

Obligations on forward fixed price contracts

 

8,730

 

34,474

 

Total current liabilities

 

1,018,071

 

1,045,195

 

Working capital revolving credit facility—less current portion

 

211,500

 

340,754

 

Revolving credit facility

 

374,700

 

422,000

 

Senior notes

 

68,058

 

 

Environmental liabilities—less current portion

 

38,380

 

39,831

 

Other long-term liabilities

 

41,136

 

45,511

 

Total liabilities

 

1,751,845

 

1,893,291

 

Partners’ equity

 

 

 

 

 

Global Partners LP equity:

 

 

 

 

 

Common unitholders (27,430,563 units issued and 27,393,786 outstanding at June 30, 2013 and 27,430,563 units issued and 27,310,648 outstanding at December 31, 2012)

 

444,952

 

456,538

 

General partner interest (0.83% interest with 230,303 equivalent units outstanding at June 30, 2013 and December 31, 2012)

 

(332

)

(407

)

Accumulated other comprehensive loss

 

(14,123

)

(19,670

)

Total Global Partners LP equity

 

430,497

 

436,461

 

Noncontrolling interest

 

40,953

 

 

Total partners’ equity

 

471,450

 

436,461

 

Total liabilities and partners’ equity

 

$

2,223,295

 

$

2,329,752

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

4,771,756

 

$

3,916,063

 

$

10,360,946

 

$

7,891,544

 

Cost of sales

 

4,673,899

 

3,825,388

 

10,167,237

 

7,745,550

 

Gross profit

 

97,857

 

90,675

 

193,709

 

145,994

 

 

 

 

 

 

 

 

 

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

27,077

 

24,036

 

53,837

 

46,503

 

Operating expenses

 

47,367

 

37,138

 

90,707

 

60,496

 

Amortization expense

 

5,677

 

2,288

 

10,053

 

3,862

 

Total costs and operating expenses

 

80,121

 

63,462

 

154,597

 

110,861

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

17,736

 

27,213

 

39,112

 

35,133

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(9,024

)

(9,148

)

(17,940

)

(18,468

)

 

 

 

 

 

 

 

 

 

 

Income before income tax benefit

 

8,712

 

18,065

 

21,172

 

16,665

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

450

 

1,875

 

450

 

 

 

 

 

 

 

 

 

 

 

Net income

 

8,712

 

18,515

 

23,047

 

17,115

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to noncontrolling interest

 

(18

)

 

472

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Global Partners LP

 

8,694

 

18,515

 

23,519

 

17,115

 

 

 

 

 

 

 

 

 

 

 

Less:

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

 

(796

)

(309

)

(1,602

)

(417

)

 

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

$

7,898

 

$

18,206

 

$

21,917

 

$

16,698

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

$

0.29

 

$

0.67

 

$

0.80

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per limited partner unit

 

$

0.29

 

$

0.66

 

$

0.80

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

27,394

 

27,376

 

27,358

 

25,466

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

27,491

 

27,549

 

27,454

 

25,638

 

 

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

 

2



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,712

 

$

18,515

 

$

23,047

 

$

17,115

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

2,049

 

(42

)

3,522

 

689

 

Change in pension liability

 

1,259

 

(90

)

2,025

 

208

 

Total other comprehensive income (loss)

 

3,308

 

(132

)

5,547

 

897

 

Comprehensive income

 

12,020

 

18,383

 

28,594

 

18,012

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(18

)

 

472

 

 

Comprehensive income attributable to Global Partners LP

 

$

12,002

 

$

18,383

 

$

29,066

 

$

18,012

 

 

 

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)

 

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

23,047

 

$

17,115

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

36,238

 

21,397

 

Amortization of deferred financing fees

 

3,318

 

2,710

 

Amortization of senior notes discount

 

158

 

 

Bad debt expense

 

1,569

 

180

 

Stock-based compensation expense

 

104

 

(46

)

Deferred income taxes

 

 

450

 

Curtailment gain

 

 

(469

)

Changes in operating assets and liabilities, exclusive of business combinations:

 

 

 

 

 

Accounts receivable

 

(48,354

)

190,344

 

Accounts receivable — affiliate

 

(93

)

988

 

Inventories

 

281,023

 

171,479

 

Broker margin deposits

 

32,772

 

14,341

 

Prepaid expenses, all other current assets and other assets

 

15,615

 

4,863

 

Accounts payable

 

1,609

 

(205,314

)

Trustee taxes payable

 

(15,705

)

(1,578

)

Change in fair value of forward fixed price contracts

 

20,296

 

(3,296

)

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

 

(23,885

)

3,136

 

Net cash provided by operating activities

 

327,712

 

216,300

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisitions

 

(185,251

)

(181,898

)

Capital expenditures

 

(30,069

)

(19,730

)

Proceeds from sale of property and equipment

 

2,413

 

4

 

Net cash used in investing activities

 

(212,907

)

(201,624

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments on working capital revolving credit facility

 

(213,000

)

(179,200

)

(Payments on) borrowings from revolving credit facility

 

(47,300

)

192,000

 

Borrowings from term loan

 

115,000

 

 

Proceeds from senior notes, net of discount

 

67,900

 

 

Repurchase of common units

 

 

(2,152

)

Repurchased units withheld for tax obligations

 

(2,086

)

(96

)

Noncontrolling interest capital contribution

 

1,425

 

 

Distributions to partners

 

(33,048

)

(24,995

)

Net cash used in financing activities

 

(111,109

)

(14,443

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

3,696

 

233

 

Cash and cash equivalents at beginning of period

 

5,977

 

4,328

 

Cash and cash equivalents at end of period

 

$

9,673

 

$

4,561

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

Cash paid during the period for interest

 

$

15,544

 

$

18,561

 

Non-cash investing activities (see Note 17)

 

 

 

 

 

 

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

 

Noncontrolling

 

Partners’

 

 

 

Unitholders

 

Interest

 

Loss

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

456,538

 

$

(407

)

$

(19,670

)

$

 

$

436,461

 

Net income

 

21,917

 

1,602

 

 

(472

)

23,047

 

Noncontrolling interest capital contribution

 

 

 

 

41,425

 

41,425

 

Other comprehensive income

 

 

 

5,547

 

 

5,547

 

Stock-based compensation

 

104

 

 

 

 

104

 

Distributions to partners

 

(31,615

)

(1,527

)

 

 

(33,142

)

Repurchased units withheld for tax obligation

 

(2,086

)

 

 

 

(2,086

)

Phantom unit dividends

 

94

 

 

 

 

94

 

Balance at June 30, 2013

 

$

444,952

 

$

(332

)

$

(14,123

)

$

40,953

 

$

471,450

 

 

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 Delaware master limited partnership formed in March 2005.  As of June 30, 2013, the Partnership had the following wholly owned subsidiaries:  Global Companies LLC, Glen Hes Corp., Global Montello Group Corp. (“GMG”), Chelsea Sandwich LLC, Global Energy Marketing LLC, Alliance Energy LLC, Bursaw Oil LLC, GLP Finance Corp., Global Energy Marketing II LLC, Global CNG LLC and Cascade Kelly Holdings LLC.  Global GP LLC, the Partnership’s general partner (the “General Partner”) manages the Partnership’s operations and activities and employs its officers and substantially all of its personnel, except for its gasoline station and convenience store employees and certain union personnel who are employed by GMG.

 

The Partnership is a midstream logistics and marketing company.  The Partnership is one of the largest distributors of gasoline (including gasoline blendstocks such as ethanol and naphtha), distillates (such as home heating oil, diesel and kerosene), residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York.  The Partnership also engages in the purchasing, selling and logistics of transporting domestic and Canadian crude oil and other products via rail, establishing a “virtual pipeline” from the mid-continent region of the United States and Canada to the East and West Coasts for distribution to refiners and other customers.  The Partnership owns, controls or has access to one of the largest terminal networks of refined petroleum products and renewable fuels in Massachusetts, Maine, Connecticut, Vermont, New Hampshire, Rhode Island, New York, New Jersey and Pennsylvania (collectively, the “Northeast”).  The Partnership also owns and controls terminals in North Dakota and Oregon that extend its origin-to-destination capabilities.  The Partnership is a major multi-brand gasoline distributor and has a portfolio of approximately 900 owned, leased and/or supplied gasoline stations primarily in the Northeast.  The Partnership is also a distributor of natural gas and propane.  In addition, the Partnership provides ancillary services to companies and receives revenue from these ancillary services and from retail sales of gasoline, convenience store sales and gasoline 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 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.

 

On February 1, 2013, the Partnership acquired a 60% membership interest in Basin Transload LLC (“Basin Transload”), and on February 15, 2013, the Partnership acquired 100% of the membership interests in Cascade Kelly Holdings LLC (“Cascade Kelly”).  See Note 2.

 

The General Partner, which holds a 0.83% general partner interest in the Partnership, is owned by affiliates of the Slifka family.  As of June 30, 2013, affiliates of the General Partner, including its directors and executive officers, owned 11,546,993 common units, representing a 42.1% limited partner interest.

 

Basis of Presentation

 

The financial results of Basin Transload for the five months ended June 30, 2013 and of Cascade Kelly for the four and one-half months ended June 30, 2013 are included in the accompanying statements of income for the six months ended June 30, 2013.  The Partnership consolidated the June 30, 2013 balance sheet of Basin Transload because the Partnership controls the entity.  The accompanying consolidated financial statements as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 reflect the accounts of the Partnership.  All intercompany balances and transactions have been eliminated.

 

6



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation (continued)

 

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, 2012 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 six months ended June 30, 2013 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2013.  The consolidated balance sheet at December 31, 2012 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, 2012.

 

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.  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.

 

Noncontrolling Interest

 

These financial statements reflect the application of ASC 810, “Consolidations” (“ASC 810”) which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.

 

The Partnership acquired a 60% interest in Basin Transload on February 1, 2013.  After evaluating ASC 810, the Partnership concluded it is appropriate to consolidate the balance sheet and statement of operations of Basin Transload based on an evaluation of the outstanding voting interests.  Amounts pertaining to the noncontrolling ownership interest held by third parties in the financial position and operating results of the Partnership are reported as a noncontrolling interest in the accompanying consolidated balance sheet and statement of income.

 

7



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation (continued)

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

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

 

59%

 

74%

 

56%

 

66%

 

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

 

41%

 

26%

 

44%

 

34%

 

Total

 

100%

 

100%

 

100%

 

100%

 

 

The Partnership had two significant customers, ExxonMobil Corporation (“ExxonMobil”) and Phillips 66 (“Phillips 66”), which accounted for approximately 14% and 16%, respectively, of total sales for the three months ended June 30, 2013, and approximately 14% and 15%, respectively, of total sales for the six months ended June 30, 2013.  The Partnership had one significant customer, ExxonMobil, which accounted for approximately 17% and 16% of total sales for the three and six months ended June 30, 2012, respectively.

 

Note 2.                     Business Combinations

 

2013 Acquisitions

 

Acquisition of Basin Transload LLC

 

On February 1, 2013, the Partnership acquired a 60% membership interest in Basin Transload, which operates two transloading facilities in Columbus and Beulah, North Dakota for crude oil and other products, with a combined rail loading capacity of 160,000 barrels per day.  The purchase price, including expenditures related to certain capital expansion projects, was approximately $91.1 million which the Partnership financed with borrowings under its credit facility.

 

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 its membership interest in Basin Transload subsequent to the acquisition date.

 

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, including tangible and intangible assets, and liabilities assumed.

 

8



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combinations (continued)

 

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

 

$

2,003

 

Prepaid expenses

 

68

 

Property and equipment

 

28,016

 

Intangibles

 

78,163

 

Total identifiable assets purchased

 

108,250

 

Liabilities assumed:

 

 

 

Accounts payable

 

(1,326

)

Total liabilities assumed

 

(1,326

)

Net identifiable assets acquired

 

106,924

 

Noncontrolling interest

 

(40,000

)

Goodwill

 

24,148

 

Net assets acquired

 

$

91,072

 

 

Management is in the process of evaluating the purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of the Partnership’s interest in Basin Transload’s property and equipment and intangibles.  Although the valuation has commenced, it remains in the early stages of progress.  Therefore, management continues to rely on its original estimate of fair value for property and equipment in the table above of $28.0 million which was developed by management based on their estimates, assumptions and acquisition history.  The fair value of $78.2 million assigned to the intangibles, primarily customer relationships, was also estimated by management based on their estimates, assumptions and acquisition history and will be updated upon completion of the Partnership’s third-party valuation firm.

 

The fair value of the noncontrolling interest has been primarily developed by management based on the fair value of the acquired business as a whole, reduced by the consideration paid by management to obtain control.  This fair value of the business was estimated based on the fair value of Basin Transload’s net assets and applying a reasonable control premium.

 

The fair values of the remaining Basin Transload assets and liabilities noted above approximate their carrying values at February 1, 2013.  It is possible that once the Partnership receives the completed valuations on the property and equipment, intangible assets and noncontrolling interest, 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.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon on their estimates and assumptions.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

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 amortizes these intangible assets over their estimated useful lives which is consistent with the estimated undiscounted future cash flows of these assets.

 

9



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combinations (continued)

 

As part of the purchase price allocation, identifiable intangible assets include customer relationships that are being amortized over five years.  Amortization expense amounted to $3.9 million and $6.5 million for the three and six months ended June 30, 2013, respectively.  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):

 

2013 (7/1/13 – 12/31/13)

 

$

7,800

 

2014

 

15,600

 

2015

 

15,600

 

2016

 

15,600

 

2017

 

15,600

 

Thereafter

 

1,300

 

Total

 

$

71,500

 

 

The $24.1 million of goodwill was assigned to the Wholesale reporting unit.  The goodwill recognized is attributed to the unique origin of the acquired locations through which the Partnership’s customers can efficiently supply cost-competitive crude oil to destinations on the East and West Coasts.  The goodwill is deductible for income tax purposes.

 

Acquisition of Cascade Kelly Holdings LLC

 

On February 15, 2013, the Partnership acquired 100% of the membership interests in Cascade Kelly, which owns a West Coast crude oil and ethanol facility near Portland, Oregon.  The total cash purchase price was approximately $94.2 million which the Partnership funded with borrowings under its credit facility and with proceeds from the issuance of the Partnership’s unsecured 8.00% senior notes due 2018 (see Note 6).  The transaction includes a rail transloading facility serviced by the Burlington Northern Santa Fe Railway, 200,000 barrels of storage capacity, a deepwater marine terminal with access to a 1,200-foot leased dock and the largest ethanol plant on the West Coast.  Situated along the Columbia River in Clatskanie, Oregon, the site is located on land leased under a long-term agreement from the Port of St. Helens.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the FASB’s guidance regarding business combinations.  The Partnership’s financial statements include the results of operations of Cascade Kelly subsequent to the acquisition date.

 

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, including tangible and intangible assets, and liabilities assumed.

 

10



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combinations (continued)

 

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

 

$

296

 

Inventory

 

517

 

Prepaid expenses

 

96

 

Property and equipment

 

45,100

 

Total identifiable assets purchased

 

46,009

 

Liabilities assumed:

 

 

 

Accounts payable

 

(1,428

)

Other current liabilities

 

(1,507

)

Total liabilities assumed

 

(2,935

)

Net identifiable assets acquired

 

43,074

 

Goodwill

 

51,105

 

Net assets acquired

 

$

94,179

 

 

Management is in the process of evaluating the purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of Cascade Kelly’s property and equipment and possible intangibles.  Although the valuation has commenced, it remains in the early stages of progress.  Therefore, management continues to rely on its original estimate of fair value for property and equipment in the table above of $45.1 million which was developed by management based on their estimates, assumptions and acquisition history.

 

The fair values of the remaining Cascade Kelly assets and liabilities noted above approximate their carrying values at February 15, 2013.  It is possible that once the Partnership receives the completed valuations on the property and equipment, 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.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, if any, based upon on their estimates and assumptions.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

The $51.1 million of goodwill was assigned to the Wholesale reporting unit.  The goodwill recognized is primarily attributed to the crude oil facility and, to a lesser extent, the ethanol plant, which will strategically enhance the Partnership’s network of origin and destination assets and extend the Partnership’s virtual pipeline to the West Coast.  The goodwill is deductible for income tax purposes.

 

11



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combinations (continued)

 

2012 Acquisition

 

Alliance Energy LLCOn March 1, 2012, pursuant to a Contribution Agreement between the Partnership and AE Holdings (the “Contribution Agreement”), 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 FASB’s 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 cash consideration of $181.9 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.

 

The 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 (see Note 11).  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 and assigned to the Gasoline Distribution and Station Operations reporting unit.

 

Goodwill — The following table presents a summary roll forward of the Partnership’s goodwill at June 30, 2013 (in thousands):

 

 

 

Goodwill at

 

 

 

Goodwill at

 

 

 

December 31,

 

2013

 

June 30,

 

 

 

2012

 

Additions

 

2013

 

Acquisition of Alliance (1)

 

 $

31,151

 

 $

 

 $

31,151

 

Acquisition of gasoline stations from Mutual Oil Company (1)

 

1,175

 

 

1,175

 

Acquisition of 60% interest in Basin Transload (2)

 

 

24,148

 

24,148

 

Acquisition of Cascade Kelly (2)

 

 

51,105

 

51,105

 

Total

 

 $

32,326

 

 $

75,253

 

 $

107,579

 

 


(1)                Goodwill allocated to the Gasoline Distribution and Station Operations reporting unit

(2)                Goodwill allocated to the Wholesale reporting unit

 

12



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Business Combinations (continued)

 

Supplemental Pro-Forma Information — Revenues and net income included in the Partnership’s consolidated operating results for Basin Transload from January 1, 2013 to February 1, 2013, the acquisition date, and for Cascade Kelly from January 1, 2013 to February 15, 2013, the acquisition date, were immaterial.  Accordingly, the supplemental pro-forma information for the six months ended June 30, 2013 is consistent with the amounts reported in the accompanying statement of income for the six months ended June 30, 2013.

 

The following unaudited pro-forma information presents the consolidated results of income of the Partnership as if the acquisitions of Basin Transload, Cascade Kelly and Alliance occurred at the beginning of the period presented, with pro-forma adjustments to give effect to intercompany sales and certain other adjustments (in thousands, except per unit data):

 

 

 

Six Months

 

 

 

Ended

 

 

 

June 30, 2012

 

 

 

 

 

Sales

 

$

8,135,917

 

Net income (loss)

 

$

(5,077

)

Basic net income per limited partner unit

 

$

(0.19

)

Diluted net income per limited partner unit

 

$

(0.19

)

 

The Partnership’s 60% interest in Basin Transload’s sales and net loss included in the Partnership’s consolidated operating results from February 1, 2013, the acquisition date, through the period ended June 30, 2013 were $4.0 million and $0.7 million, respectively.  Cascade Kelly’s sales and net loss included in the Partnership’s consolidated operating results from February 15, 2013, the acquisition date, through the period ended June 30, 2013 were $4.7 million and $0.8 million, respectively.

 

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 June 30, 2013 and December 31, 2012, common units outstanding as reported in the accompanying consolidated financial statements excluded 36,777 and 119,915 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).

 

13



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

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 six months ended June 30, 2013 and 2012 (in thousands, except per unit data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2013

 

 

Three Months Ended June 30, 2012

 

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Global Partners LP

 

$

8,694

 

$

7,898

 

$

796

 

$

 

 

$

18,515

 

$

18,206

 

$

309

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

$

16,975

 

$

16,116

 

$

135

 

$

724

 

 

$

14,781

 

$

14,401

 

$

121

 

$

259

 

Assumed allocation of undistributed net income

 

(8,281

)

(8,218

)

(63

)

 

 

3,734

 

3,805

 

(71

)

 

Assumed allocation of net income

 

$

8,694

 

$

7,898

 

$

72

 

$

724

 

 

$

18,515

 

$

18,206

 

$

50

 

$

259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

 

27,394

 

 

 

 

 

 

 

 

27,376

 

 

 

 

 

Dilutive effect of phantom units

 

 

 

97

 

 

 

 

 

 

 

 

173

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

 

27,491

 

 

 

 

 

 

 

 

27,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

 

$

0.29

 

 

 

 

 

 

 

 

$

0.67

 

 

 

 

 

Diluted net income per limited partner unit

 

 

 

$

0.29

 

 

 

 

 

 

 

 

$

0.66

 

 

 

 

 

 

14



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

Six Months Ended June 30, 2012

 

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable
to Global Partners LP (1)

 

$

23,519

 

$

21,917

 

$

1,602

 

$

 

 

$

17,115

 

$

16,698

 

$

417

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

$

33,771

 

$

32,095

 

$

269

 

$

1,407

 

 

$

28,767

 

$

28,117

 

$

236

 

$

414

 

Adjustment to distribution in connection with the Alliance acquisition (2)

 

 

 

 

 

 

(1,929

)

(1,929

)

 

 

Adjusted declared distribution

 

33,771

 

32,095

 

269

 

1,407

 

 

26,838

 

26,188

 

236

 

414

 

Assumed allocation of undistributed net income

 

(10,252

)

(10,178

)

(74

)

 

 

(9,723

)

(9,490

)

(233

)

 

Assumed allocation of net income

 

$

23,519

 

$

21,917

 

$

195

 

$

1,407

 

 

$

17,115

 

$

16,698

 

$

3

 

$

414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

 

27,358

 

 

 

 

 

 

 

 

25,466

 

 

 

 

 

Dilutive effect of phantom units

 

 

 

96

 

 

 

 

 

 

 

 

172

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

 

27,454

 

 

 

 

 

 

 

 

25,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

 

$

0.80

 

 

 

 

 

 

 

 

$

0.66

 

 

 

 

 

Diluted net income per limited partner unit

 

 

 

$

0.80

 

 

 

 

 

 

 

 

$

0.65

 

 

 

 

 

 


(1)             Calculation includes the effect of the March 1, 2012 issuance of 5,850,000 common units in connection with the acquisition of Alliance.  As a result, the general partner interest was 0.83% for the six months ended June 30, 2013 and, based on a weighted average, 0.95% for the six months ended June 30, 2012.

(2)             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 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 issued 5,850,000 common units.

 

On April 24, 2013, the board of directors of the General Partner declared a quarterly cash distribution of $0.5825 per unit for the period from January 1, 2013 through March 31, 2013.  On July 23, 2013, the board of directors of the General Partner declared a quarterly cash distribution of $0.5875 per unit for the period from April 1, 2013 through June 30, 2013.  These declared cash distributions result in incentive distributions to the General Partner, as the holder of the IDRs, and enable the Partnership to exceed its second target level distribution with respect to such IDRs.  See Note 8, “Cash Distributions” for further information.

 

15



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, primarily through futures contracts.  These futures contracts are entered into when inventory is purchased and are designated as fair value hedges against the inventory on a specific barrel basis.  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.  Inventory from Cascade Kelly was nominal at June 30, 2013 and is carried at the lower of cost or market.

 

Inventories consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Distillates: home heating oil, diesel and kerosene

 

$

91,271

 

$

235,029

 

Gasoline

 

76,070

 

144,269

 

Gasoline blendstocks

 

77,261

 

139,316

 

Residual oil and crude oil

 

100,184

 

109,423

 

Propane and other

 

2,568

 

 

Convenience store inventory

 

6,807

 

6,630

 

Total

 

$

354,161

 

$

634,667

 

 

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 $188.5 million and $120.9 million at June 30, 2013 and December 31, 2012, respectively.  Negative exchange balances are accounted for as accounts payable and amounted to $201.9 million and $139.5 million at June 30, 2013 and December 31, 2012, 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.  The Partnership principally uses derivative instruments to hedge the commodity risk associated with its inventory and product purchases and sales and to hedge variable interest rates associated with the Partnership’s credit facilities.

 

16



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 June 30, 2013:

 

 

 

Units (1)

 

Unit of Measure

 

 

 

 

 

 

 

Futures Contracts

 

 

 

 

 

Long

 

10,673

 

Thousands of barrels

 

Short

 

(13,471

)

Thousands of barrels

 

 

 

 

 

 

 

Natural Gas Contracts

 

 

 

 

 

Long

 

6,643

 

Thousands of decatherms

 

Short

 

(6,643

)

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)

 

$

20.2

 

Millions of Canadian dollars

 

 

 

$

19.2

 

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”) $1.0521 to USD $1.00.

 

Fair Value Hedges

 

The Partnership enters into futures contracts in the normal course of business to reduce the risk of loss of inventory value, which could result from fluctuations in market prices.  These futures contracts are designated as fair value hedges against the inventory with specific futures contracts matched to specific barrels of inventory.  As a result of the Partnership’s hedge designation on these transactions, the futures contracts are recorded on the Partnership’s consolidated balance sheet and marked to market through the use of independent markets based on the prevailing market prices of such instruments at the date of valuation.  Likewise, the underlying inventory being hedged is also marked to market.  Changes in the fair value of the futures contracts, as well as the change in the fair value of the hedged inventory, are recognized in the consolidated statement of income through cost of sales.  These futures contracts are settled on a daily basis by the Partnership through brokerage margin accounts.

 

The Partnership’s futures contracts are settled daily; therefore, there was no corresponding asset or liability on the Partnership’s consolidated balance sheet related to these contracts at June 30, 2013 and December 31, 2012.  These contracts remain open until their contract end date.  The daily settlement of these futures contracts is accomplished through the use of brokerage margin deposit accounts.

 

17



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table presents the hedge ineffectiveness from derivatives involved in fair value hedging relationships recognized in the Partnership’s consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (in thousands):

 

 

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

 

 

Income on Derivatives

 

 

 

Location of Gain (Loss)

 

Three Months Ended

 

Six Months Ended

 

Derivatives in Fair Value

 

Recognized in

 

June 30,

 

June 30,

 

Hedging Relationships

 

Income on Derivative

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts

 

Cost of sales

 

$

30,486

 

$

80,430

 

$

20,101

 

$

(9,448

)

 

 

 

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

 

 

Income on Hedged Items

 

 

 

Location of Gain (Loss)

 

Three Months Ended

 

Six Months Ended

 

Hedged Items in Fair Value

 

Recognized in

 

June 30,

 

June 30,

 

Hedged Relationships

 

Income on Hedged Items

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

Cost of sales

 

$

(29,974

)

$

(80,354

)

$

(19,578

)

$

9,602

 

 

Cash Flow Hedges

 

The Partnership utilizes various interest rate derivative instruments to hedge variable interest rate on its debt.  These derivative instruments are designated as cash flow hedges of the underlying debt.  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 (loss) and reclassified into interest expense or interest income in the same period during which the hedged transaction affects earnings.

 

In September 2008, the Partnership executed a zero premium interest rate collar with a major financial institution.  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 $100.0 million of one-month LIBOR-based borrowings on the credit facility (and subsequent refinancings thereof) due to changes in the one-month LIBOR rate.

 

In October 2009, the Partnership executed an 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 credit facility at a fixed rate of 3.93%.

 

In April 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 credit facility.

 

18



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5.                     Derivative Financial Instruments (continued)

 

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 June 30, 2013 and December 31, 2012 (in thousands):

 

 

 

 

 

June 30,

 

December 31,

 

Derivatives Designated as

 

 

 

2013

 

2012

 

Hedging Instruments

 

Balance Sheet Location

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

 

 

 

 

 

Interest rate cap

 

Other assets

 

$

92

 

$

35

 

 

 

 

 

 

 

 

 

Liability derivatives

 

 

 

 

 

 

 

Interest rate collar

 

Other long-term liabilities

 

$

642

 

$

1,868

 

Interest rate swap

 

Other long-term liabilities

 

9,295

 

11,534

 

Total liability derivatives

 

 

 

$

9,937

 

$

13,402

 

 

The following table presents the amount of net 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 six months ended June 30, 2013 and 2012 (in thousands):

 

 

 

 

 

Recognized in Income

 

 

 

Recognized in Income

 

 

 

 

 

on Derivatives

 

 

 

on Derivatives

 

 

 

Amount of Gain (Loss)

 

(Ineffectiveness Portion

 

Amount of Gain (Loss)

 

(Ineffectiveness Portion

 

 

 

Recognized in Other

 

and Amount Excluded

 

Recognized in Other

 

and Amount Excluded

 

 

 

Comprehensive Income

 

from Effectiveness

 

Comprehensive Income

 

from Effectiveness

 

 

 

on Derivatives

 

Testing)

 

on Derivatives

 

Testing)

 

Derivatives in

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

Cash Flow

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

Hedging Relationship

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate collar

 

$

611

 

$

545

 

$

 

$

 

$

1,226

 

$

860

 

$

 

$

 

Interest rate swap

 

1,376

 

(383

)

 

 

2,239

 

56

 

 

 

Interest rate cap

 

62

 

(204

)

 

 

57

 

(227

)

 

 

Total

 

$

2,049

 

$

(42

)

$

 

$

 

$

3,522

 

$

689

 

$

 

$

 

 

Ineffectiveness related to the interest rate collar and the interest rate swap is recognized as interest expense and was immaterial for the three and six months ended June 30, 2013 and 2012.  The effective portion related to the interest rate collar that was originally reported in other comprehensive income and reclassified to earnings was $0.7 million and $0.6 million for the three months ended June 30, 2013 and 2012, respectively, and $1.3 million and $1.2 million for the six months ended June 30, 2013 and 2012, 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 six months ended June 30, 2013 and 2012.

 

Other Derivative Activity

 

The Partnership uses futures contracts, and occasionally swap agreements, to hedge its commodity exposure under forward fixed price purchase and sale commitments on its products.  These derivatives are not designated by the Partnership as either fair value hedges or cash flow hedges.  Rather, the forward fixed price purchase and sales commitments, which meet the definition of a derivative, are reflected in the Partnership’s consolidated balance sheet.  The related futures contracts (and swaps, if applicable) are also reflected in the Partnership’s consolidated balance sheet, thereby creating an economic hedge.  Changes in the fair value of the futures contracts (and swaps, if applicable), as well as offsetting gains or losses due to the change in the fair value of forward fixed price purchase and sale commitments, are recognized in the consolidated statement of income through cost of sales.  These futures contracts are settled on a daily basis by the Partnership through brokerage margin accounts.

 

19



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5.                     Derivative Financial Instruments (continued)

 

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 other logistical issues inherent in the business, such as weather conditions.  In connection with managing these positions, maintaining a constant presence in the marketplace and managing the futures market outlook for future anticipated inventories, which are 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.  Any derivatives not involved in a direct hedging activity are marked to market and recognized in the consolidated statement of income through cost of sales.

 

The Partnership also markets and sells natural gas and propane by entering into forward purchase commitments for natural gas and propane when it enters into arrangements for the forward sale commitment of product for physical delivery to third-party users.  The Partnership reflects the fair value of forward fixed purchase and sales commitments in its consolidated balance sheet.  Changes in the fair value of the forward fixed price purchase and sale commitments are recognized in the consolidated statement of income through cost of sales.

 

During the three and six months ended June 30, 2013, the Partnership entered into forward currency contracts to hedge certain foreign denominated (Canadian) product purchases.  These forward contracts are not designated and are reflected in the consolidated balance sheet.  Changes in the fair values of these forward currency contracts are reflected in cost of sales.

 

Similar to the futures contracts used by the Partnership to hedge its inventory, the Partnership’s futures contracts are settled daily and, accordingly, there was no corresponding asset or liability in the Partnership’s consolidated balance sheets related to these contracts at June 30, 2013 and December 31, 2012.  These contracts remain open until their contract end date.  The daily settlement of these futures contracts is accomplished through the use of brokerage margin deposit accounts.

 

20



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5.                     Derivative Financial Instruments (continued)

 

The following table summarizes the derivatives not designated by the Partnership as either fair value hedges or cash flow hedges and their respective fair values and location in the Partnership’s consolidated balance sheets at June 30, 2013 and December 31, 2012 (in thousands):

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

 

Balance Sheet

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Summary of Other Derivatives

 

Item Pertains to

 

Location

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives