GLP

Business Context and Reporting Period

Company: Global Partners LP (Master Limited Partnership)

Reporting Period: Quarter ended March 31, 2009

Business Overview: Global Partners LP is a wholesale and commercial distributor of refined petroleum products (gasoline, distillates, residual oil) and natural gas, primarily operating in the Northeastern United States. The company operates through two segments: Wholesale (sales to unbranded retailers and distributors) and Commercial (sales to public sector and large industrial customers).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 40% year-over-year to $1.63 billion, driven primarily by a dramatic decline in refined petroleum product prices (Heating Oil down 56%, Gasoline down 47%).
• Profitability Increase: Despite lower sales, Net Income increased 119% to $18.86 million. This was driven by higher net product margins in distillates and gasoline, lower interest expenses due to reduced borrowing needs, and favorable weather conditions (4% colder than normal).
• Volume Growth: Aggregate product volume sold increased by approximately 50 million gallons (5%), with distillate volume up 36 million gallons due to colder temperatures.
• Expense Management: Selling, General, and Administrative (SG&A) expenses increased 63% to $18.1 million, largely due to accrued bonuses and a $0.6 million increase in bad debt reserves. Operating expenses decreased 6% to $8.5 million.
• Interest Expense: Interest expense dropped 37% to $3.8 million, attributed to lower average debt balances and lower interest rates.

Outlook, Risks, and Management Commentary

• Seasonality: Management notes that results are typically stronger in Q1 and Q4 due to higher demand for heating oil. Q2 and Q3 often require borrowing to maintain distributions.
• Weather Sensitivity: Warmer-than-normal temperatures in the Northeast could significantly reduce demand for home heating oil and residual oil.
• Commodity Risk: The company uses futures and swaps to hedge inventory and forward contracts. While hedging reduces risk, it does not eliminate it. A 10% price increase in commodities would result in a fair value loss of approximately $10.1 million on derivative positions.
• Liquidity and Credit: The company has a $750 million credit facility with $355.7 million remaining availability. Borrowing capacity is subject to a borrowing base tied to eligible current assets, which can fluctuate with commodity prices.
• Distributions: A quarterly cash distribution of $0.4875 per unit was declared for Q1 2009, payable May 15, 2009. This distribution reaches the second target distribution level, triggering incentive distribution rights for the General Partner.
• Environmental Liabilities: The company has recorded reserves for environmental remediation related to acquired terminals (e.g., ExxonMobil terminals in NY and VT). Management does not believe these will have a material impact beyond current reserves.

Investor Verification Checklist

• Margin Sustainability: Verify if the improved net product margins in distillates and gasoline are sustainable given the volatility in energy markets.
• Bad Debt Exposure: Review the $0.6 million increase in bad debt reserves and assess the credit quality of the customer base in the current economic climate.
• Weather Impact: Monitor heating degree day forecasts for the remainder of the year to gauge demand for heating oil and residual oil.
• Debt Covenants: Confirm continued compliance with the Credit Agreement's financial covenants, particularly the Combined Interest Coverage Ratio and leverage ratios, given the reliance on the borrowing base.
• Environmental Reserves: Track the status of remedial action plans for the Albany and Glenwood Landing terminals to ensure costs do not exceed the recorded $5.6 million in environmental liabilities.