Business Context and Reporting Period
Company: Global Partners LP
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Global Partners LP is a master limited partnership engaged in the wholesale and commercial distribution of refined petroleum products, renewable fuels (ethanol), and natural gas in the Northeastern United States. The company operates through Wholesale and Commercial segments, supplying gasoline, distillates, and residual oil to retailers, commercial end-users, and industrial customers. It also owns and supplies Mobil-branded retail gas stations.
Key Financial Metrics
| Metric (in thousands, except per unit) | Q1 2011 | Q1 2010 |
|---|---|---|
| Sales | $3,551,072 | $1,964,745 |
| Gross Profit | $56,250 | $47,768 |
| Operating Income | $16,173 | $21,840 |
| Net Income | $8,293 | $17,389 |
| Net Income per Diluted Unit | $0.39 | $1.23 |
| EBITDA (Non-GAAP) | $24,775 | $25,889 |
| Distributable Cash Flow (Non-GAAP) | $15,743 | $20,954 |
| Cash and Cash Equivalents | $5,847 | $750 |
| Total Debt Outstanding | $793,000 | $630,000 (approx.) |
| Working Capital | $538,000 | $445,900 |
Note: Q1 2010 debt figures are derived from balance sheet trends; Q1 2011 total borrowings under the Credit Agreement were explicitly stated as $793.0 million.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 81% to $3.55 billion, driven by a 39% increase in aggregate volume sold (1.33 billion gallons) and significantly higher refined petroleum product prices (e.g., heating oil up 43%, gasoline up 35%).
- Profitability Decline: Despite revenue growth, Net Income decreased 52% to $8.3 million. This was primarily due to a $13.1 million decrease in distillate net product margins caused by less favorable market conditions and fewer advantageous purchasing opportunities, offsetting strong gasoline margins.
- Expense Increases: Operating expenses rose 106% to $17.8 million, largely due to $8.0 million in additional costs from the newly acquired retail gas stations. SG&A expenses increased 27% to $21.1 million, driven by management costs, bank fees, and a $1.4 million increase in bad debt expense.
- Interest Expense: Interest expense nearly doubled (94% increase) to $7.9 million due to higher borrowing balances required for acquisitions and working capital, as well as higher average interest rates.
- Cash Flow: Operating cash flow turned negative, using $60.0 million compared to providing $45.5 million in the prior year. This shift was due to increased inventory carrying costs from higher prices and working capital requirements for acquisitions.
Guidance, Outlook, and Risks
- Capital Markets Activity: On February 8, 2011, the company completed a public offering of 2.645 million common units, raising approximately $69.7 million in net proceeds, which were used to reduce indebtedness. Additionally, all 5.64 million subordinated units converted to common units on February 18, 2011.
- Distributions: A quarterly cash distribution of $0.50 per unit was declared for Q1 2011, payable May 13, 2011. This exceeds the first target level distribution, triggering incentive distributions to the General Partner.
- Acquisitions: The company continues to pursue accretive acquisitions to drive growth, though success is not guaranteed. Recent acquisitions (ExxonMobil retail stations and Warex Terminals) are contributing to volume but also increasing operating costs and debt service.
- Seasonality and Weather: Results are typically stronger in Q1 and Q4 due to heating demand. Q1 2011 was 11% colder than Q1 2010, supporting distillate volumes, though margins were compressed.
- Risks:
- Commodity Prices: Fluctuations in refined product prices impact borrowing base availability and working capital requirements.
- Environmental Liabilities: The company holds approximately $33.4 million in environmental liabilities, primarily from acquired sites, with ongoing remediation costs.
- Legal Proceedings: A lawsuit by the Lyondell Chemical Company bankruptcy trustee seeks to recover approximately $6.0 million in payments; the company believes it has meritorious defenses.
- Interest Rate Risk: The company utilizes interest rate collars and swaps to hedge variable rate debt, but remains exposed to rate fluctuations outside hedged ranges.
Investor Verification Checklist
- Margin Compression: Verify the sustainability of distillate margins given the reported "less favorable market conditions" and the impact on future profitability despite volume growth.
- Debt Covenants: Confirm continued compliance with the Credit Agreement's financial covenants (minimum EBITDA, leverage ratios) given the increased debt load from acquisitions.
- Environmental Reserves: Review the adequacy of the $33.4 million environmental liability reserve, particularly regarding the $30.0 million assumed from the ExxonMobil acquisition.
- Bad Debt Exposure: Assess the specific customer risk that drove the $1.4 million increase in bad debt expense and potential future credit losses.
- Working Capital Needs: Monitor the negative operating cash flow trend and the company's ability to fund operations and distributions without further equity issuance or debt increases.