Business Context and Reporting Period
Company: Global Partners LP
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Global Partners LP is a 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 company operates through two segments: Wholesale and Commercial.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2009):
- Sales: $4,119.4 million (Decreased 43% vs. prior year due to lower product prices).
- Gross Profit: $107.8 million (Increased 28% vs. prior year).
- Operating Income: $33.9 million (Increased 41% vs. prior year).
- Net Income: $21.9 million (Increased 162% vs. prior year).
- Net Income per Diluted Limited Partner Unit: $1.60 (vs. $0.62 in prior year).
Cash Flow (Nine Months Ended Sept 30, 2009):
- Net Cash Provided by Operating Activities: $25.8 million (Decreased from $54.1 million in prior year).
- Net Cash Used in Investing Activities: $8.0 million (Capital expenditures).
- Net Cash Used in Financing Activities: $18.0 million (Primarily distributions and unit repurchases).
- Cash and Cash Equivalents (Sept 30, 2009): $0.7 million.
Balance Sheet Highlights (Sept 30, 2009):
- Total Assets: $854.3 million.
- Total Liabilities: $706.9 million.
- Partners' Equity: $147.3 million.
- Debt: Total borrowings outstanding under the Credit Agreement were $438.9 million. Remaining availability was $246.6 million.
Material Changes vs. Prior Period
- Revenue Decline: Sales dropped significantly due to a dramatic decline in refined petroleum product and natural gas prices compared to 2008. Aggregate volume sold decreased by approximately 6 million gallons for the nine-month period.
- Margin Improvement: Despite lower sales, gross profit and net income increased substantially. This was driven by higher net product margins in distillates and gasoline, improved inventory management, and advantageous purchasing opportunities.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses increased by 43% ($13.5 million) year-over-year, primarily due to accrued bonuses, bad debt accruals ($1.5 million), and professional fees.
- Interest Expense Reduction: Interest expense decreased by 29% ($4.5 million) due to lower average balances on the working capital facility and lower interest rates.
- Inventory Build-up: The company elected to carry increased inventories of approximately $180.0 million during the period due to favorable market conditions (contango), hedged via derivatives.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Seasonality: Results are generally better in the first and fourth quarters due to higher demand for home heating oil and residual oil. The company anticipates lower cash flow in the second and third quarters, potentially requiring borrowing to maintain distributions.
- Weather Impact: Warmer weather conditions could adversely affect results. Temperatures for the three months ended Sept 30, 2009, were 9% colder than normal, supporting demand.
- Acquisitions: The company is actively pursuing acquisitions to grow its asset base but notes uncertainty regarding financing and regulatory approvals.
- Distributions: A quarterly cash distribution of $0.4875 per unit was declared for the third quarter of 2009, payable in November 2009.
Risks and Contingencies:
- Regulatory Review: The Federal Trade Commission (FTC) issued a Civil Investigative Demand regarding the planned acquisition of three terminal facilities in Newburgh, NY. Closing is delayed beyond 2009 pending review.
- Commodity Risk: While hedged, the company remains exposed to price volatility. A 10% price decrease in commodities could result in a fair value loss of approximately $27.3 million on derivative positions.
- Liquidity: Borrowing availability is subject to a borrowing base tied to eligible current assets. Deteriorating economic conditions or price declines could reduce borrowing capacity.
- Environmental Liabilities: The company has recorded environmental liabilities of approximately $5.5 million related to terminal remediation, though it does not expect material costs in excess of reserves.
Investor Verification Checklist
- FTC Acquisition Status: Verify the outcome of the FTC review regarding the Newburgh, NY terminal acquisition and its impact on future growth.
- Borrowing Base Availability: Monitor the $246.6 million remaining availability under the credit agreement and potential impacts of further commodity price declines on the borrowing base.
- Seasonal Cash Flow: Assess the company's ability to maintain the $0.4875 quarterly distribution during the typically lower-volume summer months.
- Bad Debt Exposure: Review the $1.5 million bad debt accrual and the creditworthiness of the customer base, particularly given the concentration of sales (ExxonMobil accounted for ~22% of sales).
- Derivative Hedging Effectiveness: Confirm that the hedging strategy continues to effectively offset inventory and forward contract risks in a volatile market.