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GLOBAL PARTNERS LP 10-Q 2016

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
glp_Current folio_10Q_Taxonomy2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

 

 

For the quarterly period ended March 31, 2016

 

 

 

OR

 

 

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 No

 

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 No

 

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  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

 

 

(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 No

 

The issuer had 33,995,563 common units outstanding as of May 5, 2016.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I.     FINANCIAL INFORMATION

 

 

 

 

 

Item 1.     Financial Statements (unaudited) 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2016 and 2015 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 

 

 

 

 

Consolidated Statement of Partners’ Equity for the three months ended March 31, 2016 

 

 

 

 

Notes to Consolidated Financial Statements 

 

 

 

 

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

 

52 

 

 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

 

76 

 

 

 

Item 4.     Controls and Procedures 

 

78 

 

 

 

PART II.     OTHER INFORMATION 

 

80 

 

 

 

Item 1.     Legal Proceedings 

 

80 

 

 

 

Item 1A.   Risk Factors 

 

81 

 

 

 

Item 6.     Exhibits 

 

81 

 

 

 

SIGNATURES 

 

82 

 

 

 

INDEX TO EXHIBITS 

 

83 

 

 

 

 

 


 

Item 1.Financial Statements

 

GLOBAL PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,069

 

$

1,116

 

Accounts receivable, net

 

 

308,359

 

 

311,354

 

Accounts receivable—affiliates

 

 

3,482

 

 

2,578

 

Inventories

 

 

402,872

 

 

388,952

 

Brokerage margin deposits

 

 

38,855

 

 

31,327

 

Derivative assets

 

 

43,397

 

 

66,099

 

Prepaid expenses and other current assets

 

 

73,467

 

 

65,609

 

Total current assets

 

 

887,501

 

 

867,035

 

Property and equipment, net

 

 

1,217,659

 

 

1,242,683

 

Intangible assets, net

 

 

72,871

 

 

75,694

 

Goodwill

 

 

435,369

 

 

435,369

 

Other assets

 

 

42,038

 

 

42,894

 

Total assets

 

$

2,655,438

 

$

2,663,675

 

Liabilities and partners’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

255,798

 

$

303,781

 

Working capital revolving credit facility—current portion

 

 

185,200

 

 

98,100

 

Environmental liabilities—current portion

 

 

5,345

 

 

5,350

 

Trustee taxes payable

 

 

88,005

 

 

95,264

 

Accrued expenses and other current liabilities

 

 

44,584

 

 

60,328

 

Derivative liabilities

 

 

25,923

 

 

31,911

 

Total current liabilities

 

 

604,855

 

 

594,734

 

Working capital revolving credit facility—less current portion

 

 

150,000

 

 

150,000

 

Revolving credit facility

 

 

275,100

 

 

269,000

 

Senior notes

 

 

657,213

 

 

656,564

 

Environmental liabilities—less current portion

 

 

66,795

 

 

67,883

 

Financing obligation

 

 

89,845

 

 

89,790

 

Deferred tax liabilities

 

 

83,280

 

 

84,836

 

Other long-term liabilities

 

 

56,665

 

 

56,884

 

Total liabilities

 

 

1,983,753

 

 

1,969,691

 

Partners’ equity

 

 

 

 

 

 

 

Global Partners LP equity:

 

 

 

 

 

 

 

Common unitholders 33,995,563 units issued and 33,517,503 outstanding at March 31, 2016 and 33,995,563 units issued and 33,506,844 outstanding at December 31, 2015)

 

 

635,645

 

 

657,071

 

General partner interest (0.67% interest with 230,303 equivalent units outstanding at March 31, 2016 and December 31, 2015)

 

 

(1,341)

 

 

(1,188)

 

Accumulated other comprehensive loss

 

 

(7,765)

 

 

(8,094)

 

Total Global Partners LP equity

 

 

626,539

 

 

647,789

 

Noncontrolling interest

 

 

45,146

 

 

46,195

 

Total partners’ equity

 

 

671,685

 

 

693,984

 

Total liabilities and partners’ equity

 

$

2,655,438

 

$

2,663,675

 

 

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

3


 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31,

 

 

    

2016

      

2015

    

Sales

 

$

1,750,812

 

$

2,979,116

 

Cost of sales

 

 

1,620,753

 

 

2,810,558

 

Gross profit

 

 

130,059

 

 

168,558

 

Costs and operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

34,984

 

 

48,786

 

Operating expenses

 

 

72,236

 

 

68,656

 

Amortization expense

 

 

2,509

 

 

5,341

 

Loss on sale and disposition of assets and impairment charges

 

 

6,105

 

 

437

 

Total costs and operating expenses

 

 

115,834

 

 

123,220

 

Operating income

 

 

14,225

 

 

45,338

 

Interest expense

 

 

(22,980)

 

 

(13,963)

 

(Loss) income before income tax benefit (expense)

 

 

(8,755)

 

 

31,375

 

Income tax benefit (expense)

 

 

920

 

 

(966)

 

Net (loss) income

 

 

(7,835)

 

 

30,409

 

Net loss attributable to noncontrolling interest

 

 

811

 

 

6

 

Net (loss) income attributable to Global Partners LP

 

 

(7,024)

 

 

30,415

 

Less: General partner’s interest in net (loss) income, including incentive distribution rights

 

 

(47)

 

 

2,179

 

Limited partners’ interest in net (loss) income

 

$

(6,977)

 

$

28,236

 

Basic net (loss) income per limited partner unit

 

$

(0.21)

 

$

0.92

 

Diluted net (loss) income per limited partner unit

 

$

(0.21)

 

$

0.92

 

Basic weighted average limited partner units outstanding

 

 

33,517

 

 

30,599

 

Diluted weighted average limited partner units outstanding

 

 

33,517

 

 

30,712

 

 

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

4


 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2016

    

2015

    

 

Net (loss) income

 

$

(7,835)

 

$

30,409

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

 

261

 

 

183

 

 

Change in pension liability

 

 

68

 

 

91

 

 

Total other comprehensive income

 

 

329

 

 

274

 

 

Comprehensive (loss) income

 

 

(7,506)

 

 

30,683

 

 

Comprehensive loss attributable to noncontrolling interest

 

 

811

 

 

6

 

 

Comprehensive (loss) income attributable to Global Partners LP

 

$

(6,695)

 

$

30,689

 

 

 

 

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

 

5


 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

6

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,835)

 

$

30,409

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,669

 

 

28,472

 

Amortization of deferred financing fees

 

 

1,429

 

 

1,459

 

Amortization of leasehold interests

 

 

313

 

 

 —

 

Amortization of senior notes discount

 

 

343

 

 

179

 

Bad debt expense

 

 

50

 

 

35

 

Unit-based compensation expense

 

 

1,075

 

 

945

 

Write-off of financing fees

 

 

1,828

 

 

 —

 

Loss on sale and disposition of assets and impairment charges

 

 

6,105

 

 

437

 

Changes in operating assets and liabilities, excluding net assets acquired:

 

 

 

 

 

 

 

Accounts receivable

 

 

2,945

 

 

52,186

 

Accounts receivable-affiliate

 

 

(904)

 

 

58

 

Inventories

 

 

(13,920)

 

 

(15,614)

 

Broker margin deposits

 

 

(7,528)

 

 

(16,539)

 

Prepaid expenses, all other current assets and other assets

 

 

(9,952)

 

 

10,157

 

Accounts payable

 

 

(47,982)

 

 

(170,646)

 

Trustee taxes payable

 

 

(7,259)

 

 

(21,099)

 

Change in derivatives

 

 

16,714

 

 

16,121

 

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

 

 

(17,607)

 

 

(30,475)

 

Net cash used in operating activities

 

 

(53,516)

 

 

(113,915)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions

 

 

 —

 

 

(405,478)

 

Capital expenditures

 

 

(16,451)

 

 

(14,045)

 

Proceeds from sale of property and equipment

 

 

8,588

 

 

1,044

 

Net cash used in investing activities

 

 

(7,863)

 

 

(418,479)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Net borrowings from working capital revolving credit facility

 

 

87,100

 

 

175,400

 

Net borrowings from revolving credit facility

 

 

6,100

 

 

383,600

 

Payments on line of credit

 

 

 —

 

 

(700)

 

Repurchase of common units

 

 

 —

 

 

(2,442)

 

Noncontrolling interest capital contribution

 

 

357

 

 

1,880

 

Distribution to noncontrolling interest

 

 

(595)

 

 

(1,880)

 

Distributions to partners

 

 

(15,630)

 

 

(22,357)

 

Net cash provided by financing activities

 

 

77,332

 

 

533,501

 

Cash and cash equivalents

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

15,953

 

 

1,107

 

Cash and cash equivalents at beginning of period

 

 

1,116

 

 

5,238

 

Cash and cash equivalents at end of period

 

$

17,069

 

$

6,345

 

Supplemental information

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

17,232

 

$

18,860

 

 

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

6


 

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, 2015

 

$

657,071

 

$

(1,188)

 

$

(8,094)

 

$

46,195

 

$

693,984

 

Net (loss) income

 

 

(6,977)

 

 

(47)

 

 

 —

 

 

(811)

 

 

(7,835)

 

Noncontrolling interest capital contribution

 

 

 —

 

 

 —

 

 

 —

 

 

357

 

 

357

 

Distribution to noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

(595)

 

 

(595)

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

329

 

 

 —

 

 

329

 

Unit-based compensation

 

 

1,075

 

 

 —

 

 

 —

 

 

 —

 

 

1,075

 

Distributions to partners

 

 

(15,723)

 

 

(106)

 

 

 —

 

 

 —

 

 

(15,829)

 

Dividends on repurchased units

 

 

199

 

 

 —

 

 

 —

 

 

 —

 

 

199

 

Balance at March 31, 2016

 

$

635,645

 

$

(1,341)

 

$

(7,765)

 

$

45,146

 

$

671,685

 

 

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

 

 

 

7


 

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 midstream logistics and marketing master limited partnership formed in March 2005 engaged in the purchasing, selling, storing and logistics of transporting petroleum and related products, including domestic and Canadian crude oil, gasoline and gasoline blendstocks (such as ethanol), distillates (such as home heating oil, diesel and kerosene), residual oil, renewable fuels, natural gas and propane.  The Partnership also receives revenue from convenience store sales and gasoline station rental income.  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 owns transload and storage terminals in North Dakota and Oregon that extend its origin-to-destination capabilities from the mid-continent region of the United States and Canada to the East and West Coasts.  The Partnership is one of the largest distributors of gasoline, distillates, residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York.  As of March 31, 2016, the Partnership had a portfolio of 1,498 owned, leased and/or supplied gasoline stations, including 274 directly operated convenience stores, in the Northeast, Maryland and Virginia.

 

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 most of its gasoline station and convenience store employees who are employed by GMG.

 

The General Partner, which holds a 0.67% general partner interest in the Partnership, is owned by affiliates of the Slifka family.  As of March 31, 2016, affiliates of the General Partner, including its directors and executive officers and their affiliates, owned 7,434,775 common units, representing a 21.9% limited partner interest.

 

Basis of Presentation

 

On January 7, 2015, the Partnership acquired, through one of its wholly owned subsidiaries, Global Montello Group Corp. (“GMG”), 100% of the equity interests in Warren Equities, Inc. (“Warren”) from The Warren Alpert Foundation.  On January 14, 2015, the Partnership acquired the Revere terminal (the “Revere Terminal”) located in Boston Harbor in Revere, Massachusetts from Global Petroleum Corp. (“GPC”) and related entities.  On June 1, 2015, the Partnership acquired, through one of its wholly owned subsidiaries, Alliance Energy LLC (“Alliance”), retail gasoline stations and dealer supply contracts from Capitol Petroleum Group (“Capitol”).  See Note 2.

 

The financial results of Warren and the Revere Terminal for the three months ended March 31, 2015 are included in the accompanying statement of operations for the three months ended March 31, 2015.  The accompanying consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 reflect the accounts of the Partnership.  Upon consolidation, 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, 2015 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

8


 

Table of Contents 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 months ended March 31, 2016 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2016.  The consolidated balance sheet at December 31, 2015 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, 2015.

 

Due to the nature of the Partnership’s business and its reliance, in part, on consumer travel and spending patterns, the Partnership may experience more demand for gasoline 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 that the Partnership distributes.  Therefore, the Partnership’s volumes in gasoline 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 volumes are generally higher during the first and fourth quarters of the calendar year. These factors may result in 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 statements 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, LLC (“Basin Transload”) on February 1, 2013.  After evaluating ASC 810, the Partnership concluded it is appropriate to consolidate the balance sheet and statements 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 sheets and statements of operations.

 

Concentration of Risk

 

The following table presents the Partnership’s product sales and other revenues as a percentage of the consolidated sales for the periods presented:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

    

Gasoline sales: gasoline and gasoline blendstocks (such as ethanol)

 

57

%  

50

%  

Crude oil sales and crude oil logistics revenue

 

8

%  

9

%  

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

 

30

%  

38

%  

Convenience store sales, rental income and sundry sales

 

5

%  

3

%  

Total

 

100

%  

100

%  

 

9


 

Table of Contents 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the Partnership’s product margin by segment as a percentage of the consolidated product margin for the periods presented:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2016

    

2015

 

Wholesale segment

 

25

%  

42

%

GDSO segment

 

70

%  

52

%

Commercial segment

 

5

%  

6

%

Total

 

100

%  

100

%

 

See Note 10, “Segment Reporting” for additional information on the Partnership’s operating segments.

 

None of the Partnership’s customers accounted for greater than 10% of total sales for the three months ended March 31, 2016 and 2015. 

 

Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized.  The Partnership has concluded that its operating segments are also its reporting units.  At March 31, 2016 and December 31, 2015, goodwill recorded in the accompanying consolidated balance sheets aggregated $435.4 million, of which $121.7 million relates to the Wholesale segment and $313.7 million relates to the Gasoline Distribution and Station Operations (“GDSO”) segment.

 

Goodwill is tested for impairment annually as of October 1 or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable.  The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty.  The impairment test first includes a qualitative assessment in order to conclude if it is more likely than not that the reporting unit’s fair value exceeds its carrying value.  Factors considered in the qualitative analysis include changes in the business and industry, as well as macro-economic conditions, that would influence the fair value of the reporting unit as well as changes in the carrying values of the reporting unit.  If necessary, the Partnership will then complete a two-step quantitative assessment.  In the quantitative assessment, the fair value of each reporting unit is determined and compared to the book value of the reporting unit.  If the fair value of the reporting unit is less than the book value, including goodwill, then the recorded goodwill is impaired to its implied fair value with a charge to operations.  The Partnership calculates the fair value of each reporting unit using a combination of discounted cash flows and market comparables.

 

Key assumptions included in the development of the discounted cash flow value for each reporting unit include:

 

Future commodity volumes and margins.  The discounted cash flows are based on a five-year forecast with an estimate of terminal value.  In general, the reporting units’ fair values are most sensitive to volume and gross margin assumptions.  In particular, the Wholesale segment’s cash flows are impacted by the crude oil market, given the Partnership’s 2013 investment in transloading terminals in North Dakota and Oregon.  The significant decline in the price of crude oil and tight crude oil differentials negatively impacted the Partnership’s fiscal 2015 results.  The Partnership expects low crude oil prices and tight differentials to continue for a period of time, which will negatively impact the Partnership’s 2016 performance with recovery expected in 2017.  As a result of these market conditions, there is increased uncertainty and sensitivity relating to the Partnership’s future cash flow projections within its crude oil business on which the Wholesale reporting unit’s goodwill impairment analysis relies.  If market conditions, and therefore the Partnership’s performance, are worse than its projections, the Partnership may record impairment charges in the future.  Actual results may not be consistent with these

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judgments, assumptions and estimates, and goodwill impairment charges may be required in future periods.  This could have an adverse impact on the Partnership’s financial position and results of operations.

 

Discount rate commensurate with the risks involved.  The Partnership applies a discount rate to its expected cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. A higher discount rate decreases the net present value of cash flows.

 

Future capital requirements.  The Partnership’s estimates of future capital requirements are based upon a combination of authorized spending and internal forecasts.

 

On October 1, 2015, the Partnership completed its quantitative assessments for both the Wholesale and GDSO reporting units, and no impairment indicator was identified for either reporting unit.  The declining crude oil prices, changes in certain market conditions, and decline in the Partnership’s common unit price, collectively caused the Partnership to reassess its goodwill for impairment as of December 31, 2015 for the Wholesale reporting unit.  Based on the results of this assessment, the Partnership concluded that step-two of the quantitative assessment was not necessary and no impairment was required. 

 

As of March 31, 2016, the Partnership considered whether there were any change of circumstances or events during the first quarter which would more likely than not reduce the fair value of the Wholesale segment’s reporting unit below its carrying amount.  The Partnership concluded that such events and circumstances have not occurred.

 

The fair values of the Partnership’s reporting units are based on underlying assumptions that represent the Partnership’s best estimates.  Many of the factors used in assessing fair value are outside of the control of management.  A further sustained decline in commodity prices may cause the Partnership to reassess its long-lived assets and goodwill for impairment, and could result in future non-cash impairment charges as a result of such impairment assessments.  If the Partnership is required to perform step-two in the future for the Wholesale reporting unit, up to $121.7 million of goodwill assigned to this reporting unit could be written off in the period of such impairment assessment.

 

Note 2.    Business Combinations

 

2015 Acquisitions

 

Warren Equities, Inc.On January 7, 2015, the Partnership acquired, through GMG, 100% of the equity interests in Warren, one of the largest independent marketers of petroleum products in the Northeast, from The Warren Alpert Foundation.  The acquisition included 147 company-owned Xtra Mart convenience stores and related fuel operations, 53 commission agent locations and fuel supply rights for approximately 330 dealers.  The acquired properties are located in the Northeast, Maryland and Virginia.  The purchase price, inclusive of post-closing adjustments, was approximately $381.8 million, including working capital.  The acquisition was funded with borrowings under the Partnership’s credit facility and with proceeds from its December 2014 public offering of 3,565,000 common units.

 

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 Warren subsequent to the acquisition date.

 

In connection with the acquisition of Warren, the Partnership recorded acquisition costs of approximately $4.4 million for the three months ended March 31, 2015 which are included in selling, general and administrative expenses in the accompanying consolidated statement of operations.  Additionally, in January 2015 and subsequent to the acquisition date, the Partnership recorded a restructuring charge of approximately $2.3 million, which is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the three

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months ended March 31, 2015.  Approximately $0.5 million of the restructuring charge was paid during the three months ended March 31, 2015, and the remaining balance of $1.8 million was paid during the year ended December 31, 2015.

 

Revere TerminalOn January 14, 2015, through the Partnership’s wholly owned subsidiary, Global Companies LLC, the Partnership acquired the Revere Terminal located in Boston Harbor in Revere, Massachusetts from GPC, a privately held affiliate of the Partnership, and related entities for a purchase price of $23.7 million.  The acquisition includes contingent consideration which would be payable under specific circumstances involving a subsequent sale of the property during the eight years following the acquisition.  The contingent consideration was estimated to be $0 as of the acquisition date as the Partnership concluded that the sale of the terminal for non-petroleum use within the eight years following the acquisition is not probable.  The Partnership financed the transaction with borrowings under its revolving credit facility.  In connection with the Revere Terminal transaction, the pre-existing terminal storage rental and throughput agreement between the Partnership and GPC was terminated.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the FASB’s guidance regarding business combinations.  As the acquisition transitioned the Revere Terminal from a formerly leased facility to an owned facility, the transaction did not have a material impact on the Partnership’s consolidated financial statements.

 

Capitol Petroleum Group—On June 1, 2015, the Partnership acquired 97 primarily Mobil and Exxon branded owned or leased retail gasoline stations and seven dealer supply contracts in New York City and Prince George’s County, Maryland, along with certain related supply and franchise agreements and third-party leases and other assets associated with the operations from Liberty Petroleum Realty, LLC, East River Petroleum Realty, LLC, Big Apple Petroleum Realty, LLC, White Oak Petroleum, LLC, Anacostia Realty, LLC, Mount Vernon Petroleum Realty, LLC and DAG Realty, LLC (collectively, “Capitol Petroleum Group”).  The purchase price was approximately $155.7 million.  The acquisition was financed with borrowings under the Partnership’s revolving credit facility.

 

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 Capitol subsequent to the acquisition date.

 

No acquisition costs were recorded in connection with the acquisition of Capitol for the three months ended March 31, 2015.

 

Supplemental Pro Forma InformationRevenues and net income not included in the Partnership’s consolidated operating results for Warren from January 1, 2015 through January 7, 2015, the acquisition date, were immaterial.  Accordingly, the supplemental pro forma information for the three months ended March 31, 2015 is consistent with the amounts reported in the accompanying consolidated statement of operations for the three months ended March 31, 2015. 

 

The following unaudited pro forma information presents the consolidated results of operations of the Partnership as if the acquisition of Capitol occurred on January 1, 2015 (in thousands, except per unit data):

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

     

2015

 

Sales

 

$

3,114,370

 

Net income attributable to Global Partners LP

 

$

32,810

 

Net income per limited partner unit, basic and diluted

 

$

1.00

 

 

 

 

 

 

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Note 3.    Net (Loss) 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 or losses is assumed to be allocated to the common unitholders, or limited partners’ interest, and to the General Partner’s general partner interest.

 

Common units outstanding as reported in the accompanying consolidated financial statements at March 31, 2016 and December 31, 2015 excluded 478,060 and 488,719 common units, respectively, held on behalf of the Partnership pursuant to its repurchase program (see Note 13).  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 (loss) income and the assumed allocation of net (loss) income to the limited partners’ interest for purposes of computing net (loss) income per limited partner unit for the three months ended March 31, 2016 and 2015 (in thousands, except per unit data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

Three Months Ended March 31, 2015

 

 

 

 

 

  

Limited

  

General

  

 

 

 

 

 

 

  

Limited

  

General

  

 

 

 

 

 

 

 

 

Partner

 

Partner

 

 

 

 

 

 

 

 

Partner

 

Partner

 

 

 

 

Numerator:

 

Total

 

Interest

 

Interest

 

IDRs

 

 

Total

 

Interest

 

Interest

 

IDRs

 

Net (loss) income attributable to Global Partners LP (1)

 

$

(7,024)

 

$

(6,977)

 

$

(47)

 

$

 —

 

 

$

30,415

 

$

28,236

 

$

2,179

 

$

 —

 

Declared distribution

 

$

15,829

 

$

15,723

 

$

106

 

$

 —

 

 

$

23,260

 

$

21,076

 

$

157

 

$

2,027

 

Assumed allocation of undistributed net (loss) income

 

 

(22,853)

 

 

(22,700)

 

 

(153)

 

 

 —

 

 

 

7,155

 

 

7,160

 

 

(5)

 

 

 —

 

Assumed allocation of net (loss) income

 

$

(7,024)

 

$

(6,977)

 

$

(47)

 

$

 —

 

 

$

30,415

 

$

28,236

 

$

152

 

$

2,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

 

 

 

33,517

 

 

 

 

 

 

 

 

 

 

 

 

30,599

 

 

 

 

 

 

 

Dilutive effect of phantom units

 

 

 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

113

 

 

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

 

 

 

33,517

 

 

 

 

 

 

 

 

 

 

 

 

30,712

 

 

 

 

 

 

 

Basic net (loss) income per limited partner unit

 

 

 

 

$

(0.21)

 

 

 

 

 

 

 

 

 

 

 

$

0.92

 

 

 

 

 

 

 

Diluted net (loss) income per limited partner unit (2)

 

 

 

 

$

(0.21)

 

 

 

 

 

 

 

 

 

 

 

$

0.92

 

 

 

 

 

 

 


(1)

As a result of the June 2015 issuance of 3,000,000 common units, the general partner interest was reduced to 0.67% for three months ended March 31, 2016 from 0.74% for the three months ended March 31, 2015.

(2)

Basic units were used to calculate diluted net income per limited partner unit for the three months ended March 31, 2016, as using the effects of phantom units would have an anti-dilutive effect on net income per limited partner unit.

 

During 2016, the board of directors of the General Partner declared the following quarterly cash distribution:

 

 

 

 

 

 

 

 

 

 

    

Per Unit Cash

 

 

Distribution Declared for the

 

Cash Distribution Declaration Date

  

Distribution Declared

 

 

Quarterly Period Ended

 

April 26, 2016

 

$

0.4625

 

 

March 31, 2016

 

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(Unaudited)

 

See Note 8, “Partners’ Equity and Cash Distributions” for further information.

 

Note 4.    Inventories

 

The Partnership hedges substantially all of its petroleum and ethanol inventory using a variety of instruments, primarily exchange-traded futures contracts.  These futures contracts are entered into when inventory is purchased and are either designated as fair value hedges against the inventory on a specific barrel basis for inventories qualifying for fair value hedge accounting or not designated and maintained as economic hedges against certain inventory of the Partnership on a specific barrel basis.  Changes in fair value of these futures contracts, as well as the offsetting change in fair value on the hedged inventory, is recognized in earnings as an increase or decrease in cost of sales.  All hedged inventory designated in a fair value hedge relationship is valued using the lower of cost, as determined by specific identification, or market, as determined at the product level.  All petroleum and ethanol inventory not designated in a fair value hedging relationship is carried at the lower of historical cost, on a first-in, first-out basis, or market.

 

Convenience store inventory and Renewable Identification Numbers (“RINs”) inventory are carried at the lower of historical cost or market. 

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

Distillates: home heating oil, diesel and kerosene

 

$

143,206

 

$

156,411

 

Gasoline

 

 

63,468

 

 

62,467

 

Gasoline blendstocks

 

 

41,897

 

 

32,542

 

Crude oil

 

 

116,366

 

 

102,253

 

Residual oil

 

 

17,236

 

 

12,895

 

Propane and other

 

 

1,639

 

 

1,469

 

Renewable identification numbers (RINs)

 

 

664

 

 

803

 

Convenience store inventory

 

 

18,396

 

 

20,112

 

Total

 

$

402,872

 

$

388,952

 

 

In addition to its own inventory, the Partnership has exchange agreements for petroleum products and ethanol 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 $9.3 million and $3.4 million at March 31, 2016 and December 31, 2015, respectively.  Negative exchange balances are accounted for as accounts payable and amounted to $4.1 million and $12.1 million at March 31, 2016 and December 31, 2015, respectively.  Exchange transactions are valued using current carrying costs.

 

Note 5.    Derivative Financial Instruments

 

The Partnership principally uses derivative instruments, which include regulated exchange-traded futures and options contracts (collectively, “exchange-traded derivatives”) and physical and financial forwards and over-the-counter (“OTC”) swaps (collectively, “OTC derivatives”), to reduce its exposure to unfavorable changes in commodity market prices and interest rates.  The Partnership uses these exchange-traded and OTC derivatives to hedge commodity price risk associated with its inventory and undelivered forward commodity purchases and sales (“physical forward contracts”) and uses interest rate swap instruments to reduce its exposure to fluctuations in interest rates associated with the Partnership’s credit facilities.  The Partnership accounts for derivative transactions in accordance with ASC 815, “Derivatives and Hedging,” and recognizes derivatives instruments as either assets or liabilities in the consolidated

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balance sheet and measures those instruments at fair value.  The changes in fair value of the derivative transactions are presented currently in earnings, unless specific hedge accounting criteria are met.

 

The fair value of exchange-traded derivative transactions reflects amounts that would be received from or paid to the Partnership’s brokers upon liquidation of these contracts.  The fair value of these exchange-traded derivative transactions are presented on a net basis, offset by the cash balances on deposit with the Partnership’s brokers, presented as brokerage margin deposits in the consolidated balance sheets.  The fair value of OTC derivative transactions reflects amounts that would be received from or paid to a third party upon liquidation of these contracts under current market conditions.  The fair value of these OTC derivative transactions is presented on a gross basis as derivative assets or derivative liabilities in the consolidated balance sheets, unless a legal right of offset exists.  The presentation of the change in fair value of the Partnership’s exchange-traded derivatives and OTC derivative transactions depends on the intended use of the derivative and the resulting designation.

 

The following table summarizes the notional values related to the Partnership’s derivative instruments outstanding at March 31, 2016:

 

 

 

 

 

 

 

 

 

 

    

Units (1)

    

Unit of Measure

 

Exchange-Traded Derivatives

 

 

 

 

 

 

Long

 

 

56,203

 

Thousands of barrels

 

Short

 

 

(63,591)

 

Thousands of barrels

 

 

 

 

 

 

 

 

OTC Derivatives (Petroleum/Ethanol)

 

 

 

 

 

 

Long

 

 

8,006

 

Thousands of barrels

 

Short

 

 

(6,149)

 

Thousands of barrels

 

 

 

 

 

 

 

 

OTC Derivatives (Natural Gas)

 

 

 

 

 

 

Long

 

 

11,677

 

Thousands of decatherms

 

Short

 

 

(11,530)

 

Thousands of decatherms

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

200.0

 

Millions of U.S. dollars

 

Interest Rate Cap

 

$

100.0

 

Millions of U.S. dollars

 

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

 

Open Forward Exchange Contracts (2)

 

$

1.1

 

Millions of Canadian dollars

 

 

 

$

0.8

 

Millions of U.S. dollars

 


(1)

Number of open positions and gross notional values do not measure the Partnership’s risk of loss, quantify risk or represent assets or liabilities of the Partnership, but rather indicate the relative size of the derivative instruments and are used in the calculation of the amounts to be exchanged between counterparties upon settlements.

(2)

All-in forward rate Canadian dollars $1.2973 to USD $1.00.

 

Derivatives Accounted for as Hedges

 

The Partnership utilizes fair value hedges and cash flow hedges to hedge commodity price risk and interest rate risk.

 

Fair Value Hedges

 

Derivatives designated as fair value hedges are used to hedge price risk in commodity inventories and principally include exchange-traded futures contracts that are entered into in the ordinary course of business.  For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together

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with the offsetting change in fair value on the hedged item of the risk being hedged.  Gains and losses related to fair value hedges are recognized in the consolidated statement of operations through cost of sales.  These futures contracts are settled on a daily basis by the Partnership through brokerage margin accounts.

 

The Partnership’s fair value hedges include exchange-traded futures contracts and OTC derivative contracts that are hedges against inventory with specific futures contracts matched to specific barrels.  The change in fair value of these futures contracts and the change in fair value of the underlying inventory generally provide an offset to each other in the consolidated statement of operations.

 

The following table presents the gains and losses from the Partnership’s derivative instruments involved in fair value hedging relationships recognized in the consolidated statements of operations for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Gain (Loss)

 

Three Months Ended

 

 

 

Recognized in Income on

 

March 31,

 

 

 

Derivatives

 

2016

 

2015

 

Derivatives in fair value hedging relationship

    

    

    

 

    

    

 

    

    

Exchange-traded futures contracts and OTC derivative contracts for petroleum commodity products

 

Cost of sales

 

$

27,839

 

$

26,176

 

 

 

 

 

 

 

 

 

 

 

Hedged items in fair value hedge relationship

 

 

 

 

 

 

 

 

 

Physical inventory

 

Cost of sales

 

$

(24,175)

 

$

(23,621)

 

 

Cash Flow Hedges

 

Derivatives designated as cash flow hedges are used to hedge interest rate risk from fluctuations in interest rates and may include various interest rate derivative instruments entered into with major financial institutions.  For a derivative instrument being designated as a cash flow hedge, the effective portion of the derivative gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into the consolidated statement of operations through interest expense in the same period that the hedged exposure affects earnings.  The ineffective portion is recognized in the consolidated statement of operations immediately.

 

The Partnership’s cash flow hedges currently include interest rate swaps and an interest rate cap that are hedges of variability in forecasted interest payments due to changes in the interest rate on LIBOR-based borrowings, a summary of which includes the following designations:

 

·

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 expired on April 13, 2016, was 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.

 

·

In September 2013, the Partnership executed an interest rate swap with a major financial institution.  The swap, which became effective on October 2, 2013 and expires on October 2, 2018, is used to hedge the variability in cash flows in monthly 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 1.819%.

 

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(Unaudited)

In the aggregate, these hedging instruments have historically been effective in hedging the variability in interest payments due to changes in the one month LIBOR swap curve or rate with respect to $300.0 million of one month LIBOR based borrowings on the credit facility.

 

In June 2014 and as a result of the issuance of the Partnership’s $375.0 million aggregate principal amount of its 6.25% senior notes due 2022 (see Note 6), the Partnership determined that maintaining an excess of $300.0 million in principal of outstanding floating-rate debt was no longer probable.  Therefore, the Partnership elected to de-designate its interest rate cap and discontinued the related hedge accounting for this instrument.  Accordingly, at March 31, 2016, the Partnership had in place two interest rate swap agreements which are hedging $200.0 million of variable rate debt, both of which continue to be accounted for as cash flow hedges.  The interest rate cap, which expired on April 13, 2016, was not in a hedging relationship for the three months ended March 31, 2016 and 2015.  Accordingly, all changes in fair value of this instrument subsequent to the date of de-designation were recorded in the consolidated statement of operations through interest expense.

 

The following table presents the amount of gains and losses from the Partnership’s derivative instruments designated in cash flow hedging relationships recognized in the consolidated statements of operations and partners’ equity for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

Location of Gain (Loss)

 

Amount of Gain (Loss)

  

 

 

Recognized in

 

Reclassified from