Global Partners LP - 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Global Partners LP, a publicly traded master limited partnership engaged in the wholesale and commercial distribution of refined petroleum products (gasoline, distillates, residual oil) and natural gas in the Northeastern United States. The reporting period covers the three and six months ended June 30, 2009. The company operates through two segments: Wholesale and Commercial.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Sales | $2,834.1 million | $5,018.7 million |
| Gross Profit | $78.5 million | $58.3 million |
| Operating Income | $27.9 million | $17.8 million |
| Net Income | $19.8 million | $7.4 million |
| Net Income per Diluted Unit | $1.46 | $0.55 |
| EBITDA (Non-GAAP) | $36.0 million | $25.3 million |
| Distributable Cash Flow (Non-GAAP) | $25.3 million | $14.1 million |
| Cash from Operating Activities | $20.2 million | ($6.0 million) used |
| Total Debt Outstanding | $436.0 million | N/A |
| Remaining Credit Availability | $260.0 million | $211.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 44% year-over-year for the six-month period, driven primarily by a dramatic decline in refined petroleum product and natural gas prices (e.g., heating oil prices dropped 56% compared to the prior year).
- Profitability Increase: Despite lower sales, Net Income increased 169% and Gross Profit increased 35%. This was due to improved net product margins in distillates and gasoline, lower interest expenses (due to lower rates and lower average inventory balances), and favorable changes in the fair value of forward fixed price contracts.
- Volume Trends: Aggregate product volume sold increased by approximately 48 million gallons (3%) for the six months, offsetting price declines. Distillate volume increased due to colder temperatures compared to 2008, while residual oil volume decreased due to conservation and fuel switching to natural gas.
- Expense Growth: Selling, General, and Administrative (SG&A) expenses increased 47% year-over-year, largely due to higher accrued bonuses ($5.0 million increase) and bad debt accruals ($1.1 million increase) reflecting credit strain on the customer base.
Guidance, Outlook, and Risks
- Seasonality: Management notes that results are generally better in the first and fourth quarters due to higher demand for home heating oil and residual oil. The second and third quarters typically generate lower cash flow, often requiring borrowings to maintain distributions.
- Weather Sensitivity: Warmer weather conditions can adversely affect sales of heating products. The second quarter of 2009 was 9% warmer than normal.
- Acquisition Strategy: The company is actively pursuing acquisitions to grow its asset base. On August 5, 2009 (subsequent to the period end), the company entered into an agreement to acquire three terminals in Newburgh, NY, for $47.5 million.
- Key Risks:
- Commodity Prices: Volatility in refined product prices impacts borrowing capacity under the credit agreement (which is subject to a borrowing base).
- Energy Efficiency/Conversion: Long-term demand for residual oil and heating oil is threatened by energy efficiency, new technology, and conversion to natural gas.
- Credit Markets: Tightening credit markets could reduce borrowing availability or increase counterparty risk on derivative contracts.
- Environmental Liabilities: The company faces potential costs related to environmental remediation at owned or leased properties, though current reserves are deemed adequate.
- Distributions: A quarterly cash distribution of $0.4875 per unit was declared for the second quarter, payable in August 2009.
Investor Verification Checklist
- Margin Sustainability: Verify if the improved net product margins in distillates and gasoline can be sustained given the highly volatile commodity market.
- Bad Debt Exposure: Review the $1.1 million increase in bad debt accruals and assess the creditworthiness of the customer base, particularly given the economic conditions of 2009.
- Debt Covenants: Confirm continued compliance with the Credit Agreement's financial covenants (minimum working capital, EBITDA ratio, leverage ratio), especially as commodity prices fluctuate and affect the borrowing base.
- Acquisition Integration: Monitor the closing and integration of the $47.5 million terminal acquisition announced in August 2009.
- Environmental Reserves: Assess the adequacy of environmental reserves ($5.0 million for Albany/Newburgh/Burlington terminals) against potential future remediation costs.