GLP

Business Context and Reporting Period

Company: Global Partners LP
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Global Partners LP is a publicly traded master limited partnership engaged in the wholesale and commercial distribution of refined petroleum products (gasoline, distillates, residual oil) and small amounts of natural gas. The company operates through two segments: Wholesale and Commercial. It owns, controls, or has access to a significant terminal network in the Northeast United States.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($788,305) minus Total Current Liabilities ($598,671).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 42% in Q3 2008 and 60% for the nine-month period compared to 2007, driven primarily by significantly higher refined petroleum product prices and volume increases from 2007 terminal acquisitions.
• Profitability Decline: Despite revenue growth, Net Income for the nine months ended September 30, 2008, dropped 77% to $8.4 million from $36.0 million in the prior year. This decline is largely due to the absence of a $14.1 million one-time gain on the sale of an investment in NYMEX Holdings in 2007, lower net product margins in distillates and residual oil, and increased interest expenses.
• Margin Compression: Gross profit for the nine months decreased 4% to $84.2 million. Net product margins for distillates and residual oil fell significantly due to energy conservation, warmer weather, and fuel switching to natural gas.
• Interest Expense: Interest expense increased 47% year-over-year for the nine-month period to $15.4 million, attributed to higher average balances on the working capital facility required to finance inventory at elevated prices.
• Cash Flow Improvement: Net cash provided by operating activities improved significantly to $54.1 million for the nine months ended September 30, 2008, compared to a use of $19.6 million in the prior year, driven by decreases in inventory and accounts receivable balances following price peaks earlier in the year.

Guidance, Outlook, and Risks

Management Commentary:

• Seasonality: The company 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.
• Weather Impact: Warmer-than-normal temperatures in the first nine months of 2008 reduced demand for heating products. Q3 2008 was 19% warmer than normal.
• Market Conditions: Higher product prices led to increased financing costs and customer conservation. Adverse market conditions, including backwardation, intensified competition and lowered margins.
• Acquisitions: The company continues to pursue accretive acquisitions but notes uncertainty regarding financing availability due to distressed credit markets.

Risks and Contingencies:

• Credit Market Conditions: Severe reduction in credit availability could impact liquidity, borrowing capacity, and counterparty risk on derivatives.
• Commodity Price Volatility: Rapid price increases may prevent the company from passing costs to customers, reducing margins.
• Environmental Liabilities: The company faces potential liabilities related to MTBE groundwater contamination lawsuits (consolidated in multi-district litigation) and remediation obligations at acquired terminals (e.g., ExxonMobil terminals). Management does not believe these will have a material adverse impact but notes uncertainties.
• Regulatory/Investigation: The company is responding to a subpoena from the Connecticut Attorney General regarding gasoline wholesalers following Hurricane Ike.

Distributions:

• The board declared a quarterly cash distribution of $0.4875 per unit for the third quarter of 2008, payable November 14, 2008.
• Distributions are dependent on available cash and are subject to restrictions in the Credit Agreement.

Investor Verification Checklist

• Credit Covenant Compliance: Verify continued compliance with the Credit Agreement covenants, specifically the minimum EBITDA ($30.0 million for four consecutive quarters) and interest coverage ratios, given the recent amendments and market volatility.
• Inventory Valuation: Review the inventory reserve account estimate change mentioned in Note 1, which increased net income by approximately $2.5 million in Q2 2008, and assess the adequacy of current reserves given price fluctuations.
• Derivative Exposure: Confirm the effectiveness of hedging strategies (futures, swaps, collars) in offsetting commodity price risks, particularly given the $86.6 million margin payment required in the first nine months of 2008.
• Environmental Reserves: Monitor the status of remediation plans for the Albany, New York, and Glenwood Landing/Inwood, New York terminals to ensure costs do not exceed the recorded reserves of approximately $8.9 million.
• Liquidity Position: Assess the impact of the $211.8 million remaining availability under the Credit Agreement against working capital needs, especially during the off-season (Q2/Q3) when cash flow is typically lower.