Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                              |
| **For the  quarterly period ended June 30, 2008** |
| ** **                                             | ** ** | ** **                                                                                              |
| **OR**                                                 |
| ** **                                             | ** ** | ** **                                                                                              |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom              to               **

 

**Commissionfile number****001-32593**

 

**Global Partners LP**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **74-3140887**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation  or organization) |       | (I.R.S.  Employer Identification No.) |

 

**P.O. Box 9161800 South StreetWaltham, Massachusetts 02454-9161** (Address of principal executiveoffices, including zip code)

 

**(781) 894-8800******(Registrant’s telephone number, including areacode)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.      Yes x No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o | Accelerated filer x | Non-accelerated filer o                        | Smaller reporting  company o |
|----------------------------|--------------------------|------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a smaller  reporting company) |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).      Yeso No x

 

The issuer had 7,428,139 common units and 5,642,424subordinated units outstanding as of August 5, 2008.

 

 

 

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Table of Contents

 

**TABLE OFCONTENTS**

 
| **PART I.          FINANCIAL  INFORMATION**                                                     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** |
| **Item 1.        Financial  Statements**                                                                       | ** ** |
|                                                                                                                                              | ** ** |
| Consolidated Balance Sheets as of June 30, 2008  and December 31, 2007                                                                  | ** ** |
|                                                                                                                                              |       |
| Consolidated Statements of Operations for the three  and six months ended June 30, 2008 and 2007                                             |       |
|                                                                                                                                              |       |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2008 and 2007                                                       |       |
|                                                                                                                                              |       |
| Consolidated Statements of Partners’ Equity for the  six months ended June 30, 2008                                                     |       |
|                                                                                                                                              |       |
| Notes to Consolidated Financial Statements                                                                                                        |       |
|                                                                                                                                              |       |
| **Item 2.        Management’s Discussion and Analysis  of Financial Condition and Results of Operations** | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 3.        Quantitative  and Qualitative Disclosures about Market Risk**                                 | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 4.        Controls  and Procedures**                                                                    | ** ** |
| ** **                                                                                                                                        | ** ** |
| **PART II.  OTHER INFORMATION**                                                                                                         | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item  1.        Legal Proceedings**                                                                          | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item  1A.     Risk Factors**                                                                                                | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 6.        Exhibits**                                                                                    | ** ** |
| ** **                                                                                                                                        | ** ** |
| **SIGNATURES**                                                                                                                                    | ** ** |
| ** **                                                                                                                                        | ** ** |
| **INDEX TO EXHIBITS**                                                                                                                             | ** ** |

 

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Table ofContents

 

**Item 1.    Financial Statements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except unit data)**

**(Unaudited)**

** **
| ** **                                                                                                          | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                     |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                           |       | $                       | 2,420      |                        | $          | 2,110 |   |
| Accounts receivable, net                                                                                            |       | 402,035                 |       | 439,165                     |       |
| Accounts receivable—affiliates                                                                                 |       | 5,198                   |       | 4,308                       |       |
| Inventories                                                                                                         |       | 487,411                 |       | 484,259                     |       |
| Brokerage margin deposits                                                                                           |       | 15,487                  |       | 12,545                      |       |
| Fair value of forward fixed price contracts                                                                         |       | 1,432                   |       | 742                         |       |
| Prepaid expenses and other current assets                                                                           |       | 22,818                  |       | 17,736                      |       |
| Total current assets                                                                                                |       | 936,801                 |       | 960,865                     |       |
| Property and equipment, net                                                                                         |       | 161,587                 |       | 161,734                     |       |
| Intangible assets, net                                                                                              |       | 32,809                  |       | 34,168                      |       |
| Other assets                                                                                                        |       | 2,228                   |       | 2,460                       |       |
| Total assets                                                                                                        |       | $                       | 1,133,425  |                        | $          | 1,159,227 |   |
| ** **                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Liabilities and partners’ equity**                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                |       |                    |       |                        |       |
| Accounts payable                                                                                                    |       | $                       | 330,982    |                        | $          | 371,341 |   |
| Working capital revolving credit facility—current portion                                                      |       | 195,740                 |       | 304,800                     |       |
| Environmental liabilities—current portion                                                                      |       | 876                     |       | 876                         |       |
| Note payable, other                                                                                                 |       | —                  |       | 1,239                       |       |
| Accrued expenses and other current liabilities                                                                      |       | 71,049                  |       | 69,762                      |       |
| Obligations on forward fixed price contracts and other derivatives                                                  |       | 35,092                  |       | 41,892                      |       |
| Total current liabilities                                                                                           |       | 633,739                 |       | 789,910                     |       |
| Working capital revolving credit facility—less current portion                                                 |       | 254,160                 |       | 119,000                     |       |
| Acquisition facility                                                                                                |       | 71,200                  |       | 71,200                      |       |
| Environmental liabilities—less current portion                                                                 |       | 8,281                   |       | 8,340                       |       |
| Accrued pension benefit cost                                                                                        |       | 6,618                   |       | 5,236                       |       |
| Deferred compensation                                                                                               |       | 1,574                   |       | 1,481                       |       |
| Other long-term liabilities                                                                                         |       | 3,712                   |       | 3,709                       |       |
| Total liabilities                                                                                                   |       | 979,284                 |       | 998,876                     |       |
|                                                                                                                |       |                    |       |                        |       |
| **Partners’ equity**                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Common unitholders (7,428,139 units issued and outstanding at  June 30, 2008 and December 31, 2007)       |       | 162,592                 |       | 165,330                     |       |
| Subordinated unitholders (5,642,424 units issued and outstanding at  June 30, 2008 and December 31, 2007) |       | (4,494                  | )          | (2,116                      | )          |
| General partner interest (230,303 equivalent units outstanding at  June 30, 2008 and December 31, 2007)   |       | (344                    | )          | (147                        | )          |
| Accumulated other comprehensive loss                                                                                |       | (3,613                  | )          | (2,716                      | )          |
| Total partners’ equity                                                                                         |       | 154,141                 |       | 160,351                     |       |
| Total liabilities and partners’ equity                                                                         |       | $                       | 1,133,425  |                        | $          | 1,159,227 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

* *

*1*

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per unit data)**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Sales                                                                         |       | $                                                     | 2,297,709  |                                                | $          | 1,384,090 |   | $ | 5,018,701 |   | $ | 2,957,266 |   |
| Cost of sales                                                                 |       | 2,275,036                                             |       | 1,362,468                                           |       | 4,960,412 |   | 2,893,392 |   |
| Gross profit                                                                  |       | 22,673                                                |       | 21,622                                              |       | 58,289 |   | 63,874 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Costs and operating expenses:                                                 |       |                                                  |       |                                                |       |   |   |   |   |
| Selling, general and administrative expenses                                  |       | 10,182                                                |       | 11,458                                              |       | 21,255 |   | 24,864 |   |
| Operating expenses                                                            |       | 8,771                                                 |       | 6,310                                               |       | 17,796 |   | 12,200 |   |
| Amortization expenses                                                         |       | 737                                                   |       | 358                                                 |       | 1,461 |   | 716 |   |
| Total costs and operating expenses                                            |       | 19,690                                                |       | 18,126                                              |       | 40,512 |   | 37,780 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Operating income                                                              |       | 2,983                                                 |       | 3,496                                               |       | 17,777 |   | 26,094 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Interest expense                                                              |       | (4,087                                                | )          | (2,523                                              | )          | (10,117 | ) | (5,839 | ) |
| Gain on sale of investment                                                    |       | —                                                |       | —                                              |       | — |   | 14,118 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| (Loss) income before income tax expense                                       |       | (1,104                                                | )          | 973                                                 |       | 7,660 |   | 34,373 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Income tax expense                                                            |       | (150                                                  | )          | (363                                                | )          | (295 | ) | (888 | ) |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Net (loss) income                                                             |       | (1,254                                                | )          | 610                                                 |       | 7,365 |   | 33,485 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Less: General partner’s interest in net (loss) income                    |       | 22                                                    |       | (11                                                 | )          | (127 | ) | (668 | ) |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Limited partners’ interest in net (loss) income                          |       | $                                                     | (1,232     | )                                                   | $          | 599 |   | $ | 7,238 |   | $ | 32,817 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Net (loss) income per limited partner unit, basic and diluted(1)              |       | $                                                     | (0.09      | )                                                   | $          | (1.28 | ) | $ | 0.54 |   | $ | 0.47 |   |
|                                                                          |       |                                                  |       |                                                |       |   |   |   |   |
| Weighted average limited partners’ units outstanding, basic and  diluted |       | 13,071                                                |       | 12,325                                              |       | 13,071 |   | 11,808 |   |

 

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(1)      SeeNote 2 for net (loss) income per limited partner unit calculation.

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

* *

*2*

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                                                         |       |                                                |       |   |   |
| **Cash flows from operating activities**                                                     |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 7,365      |   | $ | 33,485 |   |
| Adjustments to reconcile net income to net cash (used in) provided by  operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                |       | 7,111                                               |       | 3,126 |   |
| Amortization of deferred financing fees                                                      |       | 381                                                 |       | 210 |   |
| Loss (gain) on disposition of property and equipment and other                               |       | 6                                                   |       | (1 | ) |
| Stock-based compensation expense                                                             |       | 390                                                 |       | — |   |
| Gain on sale of investment                                                                   |       | —                                              |       | (14,118 | ) |
| Changes in operating assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                          |       | 37,131                                              |       | (70,413 | ) |
| Accounts receivable – affiliate                                                         |       | (890                                                | )          | (3,518 | ) |
| Inventories                                                                                  |       | (3,153                                              | )          | 48,590 |   |
| Broker margin deposits                                                                       |       | (2,941                                              | )          | (3,965 | ) |
| Prepaid expenses, all other current assets and other assets                                  |       | (5,442                                              | )          | 7,249 |   |
| Accounts payable                                                                             |       | (40,359                                             | )          | 10,864 |   |
| Income taxes                                                                                 |       | 109                                                 |       | (1,164 | ) |
| Change in fair value of forward fixed price contracts                                        |       | (7,491                                              | )          | 75,688 |   |
| Accrued expenses and all other current liabilities                                           |       | 1,810                                               |       | 15,264 |   |
| Net cash (used in) provided by operating activities                                          |       | (5,973                                              | )          | 101,297 |   |
|                                                                                         |       |                                                |       |   |   |
| **Cash flows from investing activities**                                                     |       |                                                |       |   |   |
| Terminal acquisitions                                                                        |       | —                                              |       | (102,620 | ) |
| Proceeds from sale of investment                                                             |       | —                                              |       | 15,262 |   |
| Capital expenditures                                                                         |       | (5,523                                              | )          | (3,019 | ) |
| Proceeds from sale of property and equipment                                                 |       | 13                                                  |       | 2 |   |
| Net cash used in investing activities                                                        |       | (5,510                                              | )          | (90,375 | ) |
|                                                                                         |       |                                                |       |   |   |
| **Cash flows from financing activities**                                                     |       |                                                |       |   |   |
| Proceeds from common unit issuance, net of discount and fees                                 |       | —                                              |       | 49,099 |   |
| Proceeds from (payments on) credit facilities, net                                           |       | 26,100                                              |       | (50,600 | ) |
| Payments on note payable, other                                                              |       | (1,239                                              | )          | (157 | ) |
| Distributions to partners                                                                    |       | (13,068                                             | )          | (10,598 | ) |
| Net cash provided by (used in) financing activities                                          |       | 11,793                                              |       | (12,256 | ) |
|                                                                                         |       |                                                |       |   |   |
| Increase (decrease) in cash and cash equivalents                                             |       | 310                                                 |       | (1,334 | ) |
| Cash and cash equivalents at beginning of period                                             |       | 2,110                                               |       | 3,861 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                   | 2,420      |   | $ | 2,527 |   |
|                                                                                         |       |                                                |       |   |   |
| **Supplemental information**                                                                 |       |                                                |       |   |   |
| Cash paid during the period for interest                                                     |       | $                                                   | 10,320     |   | $ | 5,506 |   |

* *

*Theaccompanying notes are an integral part of these*consolidated financial statements.

* *

*3*

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**GLOBALPARTNERS LP**

**CONSOLIDATED STATEMENTS OFPARTNERS’ EQUITY**

**(In thousands)**

**(Unaudited)**

 
| ** **                                   | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **         | ** ** |
|----------------------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                   | ** ** | ** **      | ** ** | ** **       | ** ** | **General**  | ** ** | **Other**         | ** ** | **Total**          | ** ** |
| ** **                                   | ** ** | **Common**      | ** ** | **Subordinated** | ** ** | **Partner**  | ** ** | **Comprehensive** | ** ** | **Partners’** | ** ** |
| ** **                                   | ** ** | **Unitholders** | ** ** | **Unitholders**  | ** ** | **Interest** | ** ** | **Loss**          | ** ** | **Equity**         | ** ** |
|                                         |       |            |       |             |       |         |       |              |       |               |       |
| **Balance at December 31, 2007**        |       | $               | 165,330    |             | $          | (2,116       | )          | $                 | (147       | )                  | $          | (2,716 | ) | $ | 160,351 |   |
| Stock-based compensation                     |       | 390             |       | —           |       | —       |       | —            |       | 390                |       |
| Distributions to partners                    |       | (7,242          | )          | (5,502           | )          | (324         | )          | —            |       | (13,068            | )          |
| Comprehensive income:                        |       |            |       |             |       |         |       |              |       |               |       |
| Net income                                   |       | 4,114           |       | 3,124            |       | 127          |       | —            |       | 7,365              |       |
| Other comprehensive income:                  |       |            |       |             |       |         |       |              |       |               |       |
| Change in fair value of interest rate collar |       | —          |       | —           |       | —       |       | (116              | )          | (116               | )          |
| Change in pension liability                  |       | —          |       | —           |       | —       |       | (781              | )          | (781               | )          |
| Total comprehensive income                   |       | —          |       | —           |       | —       |       |              |       | 6,468              |       |
| **Balance at June 30, 2008**            |       | $               | 162,592    |             | $          | (4,494       | )          | $                 | (344       | )                  | $          | (3,613 | ) | $ | 154,141 |   |

 

*Theaccompanying notes are an integral part of these*consolidated financial statements.

* *

*4*

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1.**       Organizationand Basis of Presentation

** **

**Organization**

 

Global Partners LP (the “Partnership”) is a publicly traded masterlimited partnership that engages in the wholesale and commercial distributionof refined petroleum products and small amounts of natural gas and providesancillary services to companies domestically and, on a limited basis,internationally.

 

The Partnership has four operating subsidiaries:  Global Companies LLC, its subsidiary, GlenHes Corp., Global Montello Group Corp. and Chelsea Sandwich LLC (the fouroperating subsidiaries, collectively, the “Companies”).  The Companies (other than Glen Hes Corp.) arewholly owned by Global Operating LLC, a wholly owned subsidiary of thePartnership.  In addition, GLP FinanceCorp. (“GLP Finance”) is a wholly owned subsidiary of the Partnership.  GLP Finance has no material assets orliabilities.  Its activities will belimited to co-issuing debt securities and engaging in other activitiesincidental thereto.

 

The Partnership’s 1.73% general partner interest (reduced from 2%following the private placement of Class B units discussed in Note** **12) is held by Global GP LLC, the Partnership’sgeneral partner (the “General Partner”). The General Partner, which is owned by affiliates of the Slifka family,manages the Partnership’s operations and activities and employs its officersand substantially all of its personnel. Affiliates of the General Partner, including its directors and executiveofficers, own 61,824 common units and 5,642,424 subordinated units,representing a combined 42.9% limited partner interest.

 

**Basis of Presentation**

** **

***Interim Financial Statements***

** **

**Theaccompanying consolidated financial statements as of June 30, 2008 and December 31, 2007 andfor the three and six months ended June 30, 2008 and 2007 reflect the accounts of the Partnership.  All intercompany balances and transactionshave been eliminated.**

** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) andreflect all adjustments (consisting only of normal recurring adjustments andthe change in estimate discussed below) which are, in the opinion ofmanagement, necessary for a fair presentation of the financial condition andoperating results for the interim periods. Due to changes in operating procedures and efficiencies, the Partnershipchanged its estimate of the inventory reserve account which resulted in adecrease in net loss and an increase in net income of approximately $2.5** **million, or$0.19** **per limitedpartner unit, for the three and six months ended June 30, 2008.  The interim financial information, which hasbeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), should be read in conjunction with theconsolidated financial statements for the year ended December 31, 2007 andnotes thereto contained in the Partnership’s Annual Report on Form 10-K.  The results of operations for the three andsix months ended June 30, 2008are not necessarily indicative of the results of operations that will be realizedfor the entire year ending December 31, 2008.

 

As demand for some of thePartnership’s refined petroleum products, specifically home heating oil andresidual oil for space heating purposes, is generally greater during the wintermonths, sales are generally higher during the first and fourth quarters of thecalendar year which may result in significant fluctuations in the Partnership’squarterly operating results.

 

The consolidated balancesheet at December 31, 2007 has been derived from the audited consolidatedfinancial statements and footnotes thereto included in the Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

5

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1.**       Organizationand Basis of Presentation (continued)

** **

**Reclassification**

** **

**Certainprior year amounts in the consolidated financial statements and accompanyingnotes have been reclassified to conform to the current year presentation.**

** **

**Note 2.**       Net(Loss) Income Per Limited Partner Unit

 

The computation of net (loss) income per limited partner unit is basedon the weighted average number of common and subordinated units, or limitedpartner units, outstanding during the period. Basic and diluted net (loss) income per limited partner unit aredetermined by dividing net (loss) income after deducting the amount allocatedto the general partner interest (including incentive distributions on theincentive distribution rights held by the General Partner in excess of itsgeneral partner interest) by the weighted average number of outstanding limitedpartner units during the period in accordance with Emerging Issues Task Force03-06, “Participating Securities and the Two-Class Method under FASBStatement No. 128” (“EITF 03-06”). EITF 03-06 addresses the computation of earnings per share (in thePartnership’s case, net (loss) income per limited partner unit) by an entitythat has issued securities other than common stock (in the Partnership’s case,limited partner units) that contractually entitle the holder to participate individends and earnings of the entity when, and if, it declares dividends on itscommon stock (in the Partnership’s case, distributions on its limited partnerunits).  Essentially, EITF 03-06 providesthat in any accounting period where the Partnership’s aggregate net incomeexceeds its aggregate distribution for such period, the Partnership is requiredto present net income per limited partner unit as if all of the earnings forthe periods were distributed, regardless of whether those earnings wouldactually be distributed during a particular period from an economic orpractical perspective.  EITF 03-06does not impact the Partnership’s overall net (loss) income or other financialresults; however, for periods in which the Partnership’s aggregate net incomeexceeds its aggregate distributions for such period, it will have the impact ofreducing the net income per limited partner unit.  This result occurs as a larger portion of thePartnership’s aggregate earnings is allocated to the incentive distributionrights held by the General Partner, as if distributed, even though thePartnership makes cash distributions on the basis of cash available fordistributions, not earnings, in any given accounting period.  In accounting periods where aggregate netincome does not exceed aggregate distributions for such period, EITF 03-06does not have any impact on the Partnership’s net (loss) income per limitedpartner unit calculation.

 

The following sets forth the net (loss) income allocation and per unitdata using this method for the periods presented (in thousands, except per unitdata):

 
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                       |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                                                                          |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |
| Less:                                                                                      |       |                             |       |                           |       |   |   |   |   |
| General Partner’s general partner interest(1)                                         |       | 22                               |       | (11                            | )          | (127 | ) | (668 | ) |
| Non-cash reduction under EITF 98-05  allocated to limited  partners(2)                |       | —                           |       | (16,400                        | )          | — |   | (16,400 | ) |
| Net (loss) income available to limited  partners                                           |       | (1,232                           | )          | (15,801                        | )          | 7,238 |   | 16,417 |   |
| Dilutive impact of theoretical distribution  of earnings                                   |       | —                           |       | —                         |       | (239 | ) | (12,405 | ) |
| Net (loss) income available to limited  partners under EITF 03-06 and EITF 98-05 |       | $                                | (1,232     | )                              | $          | (15,801 | ) | $ | 6,999 |   | $ | 4,012 |   |

 

6

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 2.**       Net(Loss) Income Per Limited Partner Unit (continued)

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Per unit data:                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income available to limited  partners                                              |       | $                                | (0.09      | )                              | $          | (1.28 | ) | $ | 0.56 |   | $ | 1.57 |   |
| Dilutive impact of theoretical distribution  of earnings                                      |       | —                           |       | —                         |       | (0.02 | ) | (1.10 | ) |
| Net (loss) income available to limited  partners under EITF 03-06 and EITF 98-05(3) |       | $                                | (0.09      | )                              | $          | (1.28 | ) | $ | 0.54 |   | $ | 0.47 |   |
|                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average limited partner units  outstanding                                           |       | 13,071                           |       | 12,325                         |       | 13,071 |   | 11,808 |   |

 

----

(1)      Calculation includes the effect of the privateplacement of Class B units on May 9, 2007 and, as a result, thegeneral partner interest was 1.73% for the three and six months ended June 30,2008.  For the three and six months endedJune 30, 2007, the general partner interest was 1.83% and 1.99%,respectively, based on weighted averages.

 

(2)      In connection with the private placement of Class Bunits (see Note** **12), the Partnership was required to take intoaccount the effect of EITF 98-05, “Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently Adjustable ConversionRatios” (“EITF 98-05”).  As aresult, a non-cash reduction in net (loss) income available to limited partnersfor the three and six months ended June 30, 2007 was recorded because thefair value of the Partnership’s common units on May 9, 2007 (the date onwhich the Class B units were issued) was greater than the purchase priceof the Class B units, which was established at the time of the executionof the Unit Purchase Agreement on March 14, 2007.  Although EITF 98-05 affected net (loss)income available to limited partners, it did not affect net income nor did itaffect total unitholders’ equity.

 

(3)      Per unit data includes the weighted averageeffect of the private placement of Class B units which converted to commonunits for the three and six months ended June 30, 2007.  Per unit data is calculated on a quarterlybasis pursuant to EITF 03-06, therefore, per unit data for the six monthsended June 30, 2008 and 2007 equals the sums of the respective first twoquarters.

 

On April 23, 2008, the board declared a quarterly cashdistribution of $0.4875 per unit for the period from January 1, 2008through March 31, 2008.  On July 21,2008, the board declared a quarterly cash distribution of $0.4875 per unitfor the period from April 1, 2008 through June 30, 2008.  These declared cash distributions resulted inincentive distributions to the General Partner, as the holder of the incentivedistribution rights, as indicated above, and enabled the Partnership to reach itssecond target distribution with respect to such incentive distributionrights.  See Note 9, “CashDistributions” for further information.

 

**Note 3.**       ComprehensiveIncome

** **

The components of comprehensive income consisted of the following (inthousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net (loss) income                             |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |
| Change in fair value of interest rate  collar |       | 2,280                            |       | 540                            |       | (116 | ) | 540 |   |
| Change in pension liability                   |       | (217                             | )          | 129                            |       | (781 | ) | 77 |   |
| Unrealized gain on NYMEX shares               |       | —                           |       | —                         |       | — |   | (12,837 | ) |
| Total comprehensive income                    |       | $                                | 809        |                           | $          | 1,279 |   | $ | 6,468 |   | $ | 21,265 |   |

 

7

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 4.**       Inventories

** **

The Partnership hedges substantially all of its inventory purchasesthrough futures contracts and swap agreements. Hedges are executed when inventory is purchased and are identified withthat specific inventory.  Changes in thefair value of these contracts, as well as the offsetting gain or loss on thehedged inventory item, are recognized currently in earnings.  All hedged inventory is valued using thelower of cost, as determined by specific identification, or market.  Prior to sale, hedges are removed fromspecific barrels of inventory, and the then unhedged inventory is sold andaccounted for on a first-in, first-out basis. Inventories consisted of the following (in thousands):

 
| ** **                                          | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                |       |                    |       |                        |       |
| Distillates: home heating oil, diesel and  kerosene |       | $                       | 267,821    |                        | $          | 344,984 |   |
| Residual oil                                        |       | 48,847                  |       | 50,054                      |       |
| Gasoline                                            |       | 127,276                 |       | 71,916                      |       |
| Blend stock                                         |       | 43,467                  |       | 17,305                      |       |
| Total                                               |       | $                       | 487,411    |                        | $          | 484,259 |   |

 

In addition to its own inventory, the Partnership has exchangeagreements with unrelated third-party suppliers, whereby it may draw inventoryfrom these other suppliers and suppliers may draw inventory from thePartnership.  Positive exchange balancesare accounted for as accounts receivable and amounted to $54.4 million and$36.8 million at June 30, 2008 and December 31, 2007,respectively.  Negative exchange balancesare accounted for as accounts payable and amounted to $46.2 million and$11.1 million at June 30, 2008 and December 31, 2007,respectively.  Exchange transactions arevalued using current quoted market prices.

 

**Note 5.**       DerivativeFinancial Instruments

** **

**ThePartnership accounts for its derivatives in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended (“SFAS No. 133”).  SFAS No. 133 establishes accounting andreporting standards for derivative instruments and hedging activities and requiresthat an entity recognize derivatives as either assets or liabilities on thebalance sheet and measure the instruments at fair value.  Changes in the fair value of the derivativeare to be recognized currently in earnings, unless specific hedge accountingcriteria are met.**

** **

***Fair ValueHedges***

** **

**The fairvalue of the Partnership’s derivatives is determined through the use ofindependent markets and is based upon the prevailing market prices of suchinstruments at the date of valuation. The Partnership enters into futures contracts for the receipt ordelivery of refined petroleum products in future periods.  The contracts are entered into in the normalcourse of business to reduce risk of loss of inventory on hand, which couldresult through fluctuations in market prices. Changes in the fair value of these contracts, as well as the offsettinggain or loss on the hedged inventory item, are recognized currently inearnings.  Ineffectiveness related tothese hedging activities was immaterial at June 30, 2008.**

** **

The Partnership also usesfutures contracts and swap agreements to hedge exposure under forward purchaseand sale commitments.  These agreementsare intended to hedge the cost component of virtually all of the Partnership’sforward purchase and sale commitments. Changes in the fair value of these contracts, as well as offsettinggains or losses on the forward fixed price purchase and sale commitments, arerecognized currently in earnings.  Gainsand losses on net product margin from forward fixed price purchase and salecontracts are reflected in earnings as these contracts mature.

 

8

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 5.**       DerivativeFinancial Instruments (continued)

 

The composition and fair value of derivative instruments relating toforward fixed price purchase and sale contracts on the Partnership’sconsolidated balance sheet consisted of the following (in thousands):

 
| ** **                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                          |       |                    |       |                        |       |
| Futures contracts             |       | $                       | (32,380    | )                           | $          | (37,355 | ) |
| Swaps, options and other, net |       | (1,280                  | )          | (3,795                      | )          |
| Total                         |       | $                       | (33,660    | )                           | $          | (41,150 | ) |

 

The Partnership alsomarkets and sells natural gas.  ThePartnership generally conducts business by entering into forward purchasecommitments for natural gas only when it simultaneously enters intoarrangements for the sale of product for physical delivery to third-partyusers.  The Partnership generally takesdelivery under its purchase commitments at the same location as it delivers tothird-party users.  Through thesetransactions, which establish an immediate margin, the Partnership seeks to maintaina position that is substantially balanced between firm forward purchase andsales commitments.  Natural gas isgenerally purchased and sold at fixed prices and quantities.  Current price quotes from actively tradedmarkets are used in all cases to determine the contracts’ fair value.  Changes in the fair value of these contractsare recognized currently in earnings as an increase or decrease in cost ofsales.

 

The Partnership formally documents all relationships between hedginginstruments and hedged items after its risk management objectives and strategyfor undertaking the hedge are determined. The Partnership calculates hedge effectiveness on a quarterlybasis.  This process includes specificidentification of the hedging instrument and the hedged transaction, the natureof the risk being hedged and how the hedging instrument’s effectiveness will beassessed.  Both at the inception of thehedge and on an ongoing basis, the Partnership assesses whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair value of hedged items. The derivative instruments that qualify for hedge accounting are fairvalue hedges.

 

The Partnership has a daily margin requirement with its broker based onthe prior day’s market results on open futures contracts.  The required brokerage margin balance was$15.5 million and $12.5 million at June 30, 2008 and December 31,2007, respectively.

 

The Partnership is exposed to credit loss in the event ofnonperformance by counterparties of futures contracts, options and swapagreements, but the Partnership has no current reason to expect any materialnonperformance by any of these counterparties. Futures contracts, the primary derivative instrument utilized by thePartnership, are traded on regulated exchanges, greatly reducing potentialcredit risks.  Exposure on swap andcertain option agreements is limited to the amount of the recorded fair valueas of the balance sheet dates.  ThePartnership utilizes primarily one clearing broker, a major financialinstitution, for all New YorkMercantile Exchange****(“NYMEX”)derivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is presented on a net basis on the consolidated balance sheets.

 

***Interest Rate Hedge***

 

The Partnershipexecuted a zero premium interest rate collar with a major financialinstitution.  The collar, which becameeffective on May 14, 2007, is used to hedge the variability in interestpayments due to changes in the three-month LIBOR rate with respect to $100.0 million of long-termthree-month LIBOR-based borrowings. Under the collar, the Partnership capped its exposure at a maximumthree-month LIBOR rate of 5.75%.  Inaddition, the Partnership established a minimum floor rate of 3.75%.  As of June 30, 2008, thethree-month LIBOR rate of 2.68% was lower than the floor rate.  As a result, the Partnership will remit tothe financial institution the difference between

 

9

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 5.**       DerivativeFinancial Instruments (continued)

** **

the floor rate and the current rate which amounted to approximately$143,300 and was recorded in accrued expenses and other current liabilities onthe accompanying balance sheet.  The collar, which expires onMay 14, 2011, is designated as a cash flow hedge and is accounted forunder the provisions of SFAS No. 133. As of June 30,2008, the change in fair value of the collar was a liability of approximately$1.4 millionand was recorded in both other long-term liabilities and accumulated othercomprehensive income.  There was noineffectiveness related to the collar as of June 30, 2008.

 

**Note 6.**       Debt

** **

The Partnership has a senior secured credit agreement (the “CreditAgreement”) with total available commitments of $750.0** **million.  There are three facilities under the CreditAgreement:

 

·      a working capital revolving creditfacility to be used for working capital purposes and letters of credit in theprincipal amount equal to the lesser of the Partnership’s borrowing base and$650.0 million, of which two $50.0 million seasonal overline facilitiesare available each year only during the period between September 1 and June 30(on July 21, 2008, the Credit Agreement was amended to reinstate theseasonal overline period from July 21, 2008 through August 31, 2008as further discussed below);

 

·      an $85.0 million acquisitionfacility to be used for funding acquisitions similar to the Partnership’sbusiness line that have a purchase price of $25.0 million or less or$35.0 million or less in the aggregate in any 12-month period; and

 

·      a $15.0 million revolving credit facility tobe used for general purposes, including payment of distributions to thePartnership’s unitholders.

 

In addition, provided no Event of Default (as defined in the CreditAgreement) then exists, the Partnership may request to increase:  (1) the acquisition facility by up toanother $50.0 million, for a total acquisition facility of up to $135.0 million;and (2) the working capital revolving credit facility by up to another$100.0 million, for a total working capital revolving credit facility ofup to $750.0 million.  Any suchrequest for an increase by the Partnership must be in a minimum amount of $5.0 million,and no more than three such requests may be made for each facility.

 

During the period from January 1, 2008 through June 30, 2008,borrowings under the Partnership’s working capital revolving credit,acquisition and revolving credit facilities bore interest at the Partnership’soption at (1) the Eurodollar rate, plus 1%, 11⁄2% and 11⁄2%, respectively, (2) thecost of funds rate, plus 1%, 13⁄4% and 11⁄2%, respectively, or (3) the bank’sbase rate.  The average interest ratesfor the three and six months ended June 30, 2008 were approximately 3.8%and 4.2%, respectively.  In addition, the Partnershipexecuted a zero premium interest rate collar with a major financialinstitution.  The collar, which becameeffective on May 14, 2007, is used to hedge the variability in interestpayments due to changes in the three-month LIBOR rate with respect to $100.0 million of long-termthree-month LIBOR-based borrowings (see Note 5 for further discussion onthe interest rate collar).

 

The Partnership incurs a letter of credit fee of 1% per annum for eachletter of credit issued.  In addition,the Partnership incurs a commitment fee on the unused portion of the threefacilities under the Credit Agreement (including the unused portion of eitherof the seasonal overline facilities exercised by the Partnership) at a rate of25 basis points per annum, a facility fee of 10 basis points perannum on any unexercised seasonal overline facility during the period between September 1and June 30 and a seasonal overline fee of $30,000 each time thePartnership elects to exercise either of the seasonal overline facilities.

 

10

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 6.**       Debt(continued)

** **

The Credit Agreement will mature on April 22, 2011.  The Partnership classifies a portion of itsworking capital revolving credit facility as a long-term liability because thePartnership has a multi-year, long-term commitment from its bank group.  The long-term portion of the working capitalrevolving credit facility was $254.2 million and $119.0 million at June 30,2008 and December 31, 2007, respectively, representing the amountsexpected to be outstanding during the year. In addition, the Partnership classifies a portion of its working capitalrevolving credit facility as a current liability because it repays amountsoutstanding and reborrows funds based on its working capital requirements.  The current portion of the working capitalrevolving credit facility was approximately $195.7 million and$304.8 million at June 30, 2008 and December 31, 2007,respectively, representing the amounts the Partnership expects to pay downduring the course of the year.

 

As of June 30, 2008, the Partnership had total borrowingsoutstanding under the Credit Agreement of $521.1 million, including$71.2 million outstanding on the acquisition facility, and outstandingletters of credit of $84.6 million. The total remaining availability for borrowings and letters of credit atJune 30, 2008 was $144.3 million.

 

The Credit Agreement is secured by substantially all of the assets ofthe Partnership and each of the Companies and is guaranteed by the GeneralPartner.  The Credit Agreement imposescertain requirements including, for example, a prohibition againstdistributions if any potential default or Event of Default (as defined in theCredit Agreement) would occur, and limitations on the Partnership’s ability togrant liens, make certain loans or investments, incur additional indebtednessor guarantee other indebtedness, make any material change to the nature of thePartnership’s business or undergo a fundamental change, make any materialdispositions, acquire another company, enter into a merger, consolidation, saleleaseback transaction or purchase of assets, or make capital expenditures inexcess of specified levels.

 

The Credit Agreement imposes covenants that require the Partnership tomaintain certain minimum working capital amounts, capital expenditure limits, aminimum EBITDA ratio, a minimum interest coverage ratio and a maximum leverageratio.  In the event of default under anyof these covenants, the Partnership may seek a waiver or amendment of thecovenants.  Pursuant to the CreditAgreement, the minimum combined interest coverage ratio for the quarter ended June 30,2008 was 2.50:1.00.  As of July 18,2008, the Credit Agreement was amended retroactively to June 30, 2008 withrespect to the combined interest coverage ratio covenant and the minimum wasreduced to 1.75:1.00.  The Partnershipwas in compliance with these covenants, as amended, at June 30, 2008.

 

The Credit Agreement also requires that in each calendar year, theoutstanding amount under the working capital revolving credit facility must beequal to or less than $263.0 million for a period of ten consecutive calendardays.

 

The Credit Agreement limits distributions by the Partnership to itsunitholders to the amount of the Partnership’s available cash and permitsborrowings to fund such distributions only under the $15.0 millionrevolving credit facility.  The revolvingcredit facility is subject to an annual “clean-down” period, requiring thePartnership to reduce the amount outstanding under the revolving creditfacility to $0 for 30 consecutive calendar days in each calendar year.

 

The Credit Agreement was amended on July 18, 2008 (the “Amendment”)to provide that, among other things:

 

·      The seasonal overline period for the existing two $50.0 millionseasonal overline facilities, which ended on June 30, 2008, has beenreinstated for the period from July 21, 2008 through August 31,2008.  During this seasonal overline extension period, up to $650.0million, which includes the existing two seasonal overline facilities, will beavailable to the Partnership under the working capital revolving creditfacility.

 

11

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 6.**       Debt(continued)

** **

·      Borrowingsunder the working capital revolving credit facility will bear interest at (1) theEurodollar rate plus 175 to 225 basis points, (2) the cost of fundsrate plus 175 to 225 basis points, or (3) the base rate plus 75 to125 basis points, each depending on the pricing level provided in theAmendment, which in turn depends upon the Combined Interest Coverage Ratio (assuch term is defined in the Credit Agreement).  Borrowings under theacquisition and revolving credit facilities will bear interest at (1) theEurodollar rate plus 225 to 275 basis points, (2) the cost of fundsrate plus 175 to 225 basis points, or (3) the base rate plus 75 to125 basis points, each depending on the pricing level provided in theAmendment, which in turn depends upon the Combined Interest Coverage Ratio.

 

·      A commitment fee will be incurred on the unused portion of the threefacilities equal to 30.00 to 37.50 basis points, depending on the pricing leveland the Combined Interest Coverage Ratio as provided in the Amendment.

 

·      The Amendment increases the amount that maybe requested by the Partnership under the Total WC Revolver Commitment (as suchterm is defined in the Credit Agreement) by $100.0 million, to anaggregate total of $200.0 million, so long as there is no Default or Eventof Default (as such terms are defined in the Credit Agreement) at the time ofany such request by the Partnership, and provided that any such request must bein a minimum amount of $5.0 million.

 

·      The Minimum EBITDA (as defined in the CreditAgreement) as at the end of the June 30, 2008 fiscal quarter and eachfiscal quarter ending thereafter shall not be less than $30.0 million.

 

·      The Combined Interest Coverage Ratio (asdefined in the Credit Agreement) as of the end of any fiscal quarter shall notbe less than (i) 1.75:1.00 for the fiscal quarters ending June 30,2008, September 30, 2008 and December 31, 2008 and (ii) 2.00:1.00for the fiscal quarter ending March 31, 2009 and each fiscal quarterthereafter.

 

**Note 7.**       EmployeeBenefit Plan with Related Party

** **

The General Partneremploys substantially all of the Partnership’s employees and charges thePartnership for their services.  ThePartnership also reimburses the General Partner for its contributions under theGeneral Partner’s 401(k) Savings and Profit Sharing Plan and the GeneralPartner’s qualified and non-qualified pension plans.  The Partnership’s net periodic benefit costfor its defined benefit pension plan consisted of the following components (inthousands):

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                           |       |                             |       |                           |       |   |   |   |   |
| Service cost                   |       | $                                | 266        |                           | $          | 203 |   | $ | 531 |   | $ | 407 |   |
| Interest cost                  |       | 200                              |       | 164                            |       | 400 |   | 327 |   |
| Expected return on plan assets |       | (165                             | )          | (158                           | )          | (330 | ) | (316 | ) |
| Net periodic benefit cost      |       | $                                | 301        |                           | $          | 209 |   | $ | 601 |   | $ | 418 |   |

 

12

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 8.**       RelatedParty Transactions

** **

The Partnership is a party to a Second Amended and Restated TerminalStorage Rental and Throughput Agreement with Global Petroleum Corp. (“GPC”), anaffiliate of the Partnership, which extends through December 2013 with annualrenewal options.  The agreement isaccounted for as an operating lease.  Theexpenses under this agreement totaled approximately $2.1** **millionand $2.0** **million for the three monthsended June 30,** **2008 and2007, respectively, and $4.2** **millionand $4.1** **million for the six months ended June 30,** **2008 and 2007, respectively.

 

Pursuant to an Amended and Restated Services Agreement with GPC, GPCprovides certain terminal operating management services to the Partnership anduses certain administrative, accounting and information processing services ofthe Partnership.  The expenses from theseservices totaled approximately $21,500 and $18,000 for the three months ended June 30,2008 and 2007, respectively, and $43,000 and $36,000 for the six months ended June 30,2008 and 2007, respectively.  Thesecharges were recorded in selling, general and administrative expenses in theaccompanying consolidated statements of operations.  The agreement is for an indefinite term, andeither party may terminate its receipt of some or all of the servicesthereunder upon 180 days’ notice at any time after January 1, 2009.

 

Pursuant to the Partnership’s Amended and Restated Services Agreementwith Alliance Energy LLC (formerly known as Alliance Energy Corp.) (“Alliance”),the Partnership also provides certain administrative, accounting andinformation processing services, and the use of certain facilities, toAlliance, an affiliate of the Partnership that is 95% owned by members of theSlifka family.  The income from theseservices was approximately $216,500 and $132,000 for the three months ended June 30,2008 and 2007, respectively, and $433,000 and $264,000 for the six months endedJune 30,** **2008 and 2007,respectively.  These fees were recordedas an offset to selling, general and administrative expenses in theaccompanying consolidated statements of operations.  The agreement extends through January 1,2009.

 

The Partnership sells refined petroleum products to Alliance atprevailing market prices at the time of delivery.  Sales to Alliance were approximately$13.6 million and $13.2 million for the three months ended June 30,2008 and 2007, respectively, and $19.4 million and $19.0 million forthe six months ended June 30,** **2008 and2007, respectively.

 

The General Partner employs substantially all of the Partnership’semployees and charges the Partnership for their services.  The expenses for the three months ended June 30,2008 and 2007, including payroll, payroll taxes and bonus accruals, were$6.7 million and $6.3 million, respectively, and $14.4 millionand $14.6 million for the six months ended June 30,** **2008 and 2007, respectively.  The Partnership also reimburses the GeneralPartner for its contributions under the General Partner’s 401(k) Savingsand Profit Sharing Plan and the General Partner’s qualified and non-qualifiedpension plans.

 

The table below presents trade receivableswith Alliance, receivables incurred in connection with the services agreementsbetween Alliance and the Partnership and GPC and the Partnership, as the casemay be, and receivables from the General Partner (in thousands):

 
| ** **                               | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                     |       |                    |       |                        |       |
| Receivables from Alliance                |       | $                       | 4,663      |                        | $          | 3,926 |   |
| Receivables from GPC                     |       | 247                     |       | 64                          |       |
| Receivables from the General Partner (1) |       | 288                     |       | 318                         |       |
| Total                                    |       | $                       | 5,198      |                        | $          | 4,308 |   |

 

----

(1)    Receivables from the General Partner reflect the Partnership’sprepayment of payroll taxes and payroll accruals to the General Partner.

 

13

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 9.**       CashDistributions

** **

The Partnership intends to consider regular cash distributions tounitholders on a quarterly basis, although there is no assurance as to thefuture cash distributions since they are dependent upon future cash flows,capital requirements, financial condition and other factors.  The Credit Agreement prohibits thePartnership from making cash distributions if any potential default or event ofdefault, as defined in the Credit Agreement, occurs or would result from thecash distribution.

 

Within 45 days after the end of each quarter, the Partnership willdistribute all of its available cash (as defined in its partnership agreement)to unitholders of record on the applicable record date.  The amount of available cash is all cash onhand at the end of the quarter; plus all cash on hand on the date ofdetermination of available cash for the quarter resulting from working capitalborrowings made after the end of the quarter; less the amount of cash reservesestablished by the General Partner to provide for the proper conduct of thePartnership’s business, to comply with applicable law, any of the Partnership’sdebt instruments, or other agreements or to provide funds for distributions tounitholders and to the General Partner for any one or more of the next fourquarters.  Working capital borrowings aregenerally borrowings that are made under the Credit Agreement and in all casesare used solely for working capital purposes or to pay distributions topartners.

 

The Partnership will make distributions of available cash fromoperating surplus for any quarter during the subordination period as defined inits partnership agreement in the following manner: firstly, 98.27% to thecommon unitholders, pro rata, and 1.73% to the General Partner, until thePartnership distributes for each outstanding common unit an amount equal to theminimum quarterly distribution for that quarter; secondly, 98.27% to the commonunitholders, pro rata, and 1.73% to the General Partner, until the Partnershipdistributes for each outstanding common unit an amount equal to any arrearagesin payment of the minimum quarterly distribution on the common units for anyprior quarters during the subordination period; thirdly, 98.27% to thesubordinated unitholders, pro rata, and 1.73% to the General Partner, until thePartnership distributes for each subordinated unit an amount equal to the minimumquarterly distribution for that quarter; and thereafter, cash in excess of theminimum quarterly distributions is distributed to the unitholders and theGeneral Partner based on the percentages as provided below.

 

As the holder of the incentive distribution rights, the General Partneris entitled to incentive distributions if the amount that the Partnershipdistributes with respect to any quarter exceeds specified target levels shownbelow:

 
| ** **                     | ** ** | **Total Quarterly Distribution** | ** ** | **Marginal Percentage Interest in  Distributions** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Target Amount**                     | ** ** | **Unitholders**                                                   | ** ** | **General Partner** | ** ** |
| Minimum Quarterly Distribution |       | $0.4125                                    |       | 98.27                                                             | %          | 1.73 | % |
| First Target Distribution      |       | Up to $0.4625                              |       | 98.27                                                             | %          | 1.73 | % |
| Second Target Distribution     |       | above $0.4625 up to $0.5375                |       | 85.27                                                             | %          | 14.73 | % |
| Third Target Distribution      |       | above $0.5375 up to $0.6625                |       | 75.27                                                             | %          | 24.73 | % |
| Thereafter                     |       | above $0.6625                              |       | 50.27                                                             | %          | 49.73 | % |

 

The Partnership paid the following cash distribution during 2008 (inthousands, except per unit data):

 
| **Cash  Distribution  Payment Date** | ** ** | **Per Unit  Cash  Distribution** | ** ** | **Common  Units** | ** ** | **Subordinated  Units** | ** ** | **General  Partner** | ** ** | **General  Partner  Incentive  Distribution** | ** ** | **Total Cash  Distribution** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------|------------|-------------------------|------------|----------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|
| 02/14/08(1)                               |       | $                                     | 0.4875     |              | $          | 3,621                   |       | $                    | 2,751      |                                          | $          | 112                               |       | $ | 50 |   | $ | 6,534 |   |
| 05/14/08(2)                               |       | $                                     | 0.4875     |              | $          | 3,621                   |       | $                    | 2,751      |                                          | $          | 112                               |       | $ | 50 |   | $ | 6,534 |   |

 

----

(1)   This distribution of $0.4875 per unit resulted in the Partnershipreaching its second target distribution for the fourth quarter of 2007.  As a result, the General Partner receivedthis incentive distribution.

(2)   This distribution of $0.4875 per unit resulted in the Partnershipreaching its second target distribution for the first quarter of 2008.  As a result, the General Partner receivedthis incentive distribution.

 

14

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 9.**       CashDistributions (continued)

** **

In addition, on July 21, 2008, the board of directors of theGeneral Partner declared a quarterly cash distribution of $0.4875 per unit forthe period from April 1, 2008 through June 30, 2008 ($1.95 per uniton an annualized basis).  On August 14,2008, the Partnership will pay this cash distribution to its common andsubordinated unitholders of record as of the close of business August 5,2008.  This distribution will result in thePartnership reaching its second target distribution for the quarter ended June 30,2008.

 

**Note 10.**     SegmentReporting

** **

The Partnership is a wholesale and commercial distributor of gasoline,distillates and residual oil whose business is organized within two operatingsegments, Wholesale and Commercial, based on the way the chief operatingdecision maker (CEO) manages the business and on the similarity of customersand expected long-term financial performance of each segment.  The accounting policies of the segments arethe same as those described in Note 2, “Summary of Significant AccountingPolicies,” in the Partnership’s Annual Report on Form 10-K for the yearended December 31, 2007.

 

In the Wholesale segment, the Partnership sells gasoline, home heatingoil, diesel, kerosene and residual oil to unbranded retail gasoline stationsand other resellers of transportation fuels, home heating oil retailers andwholesale distributors.  Generally,customers use their own vehicles or contract carriers to take delivery of theproduct at bulk terminals and inland storage facilities that the Partnershipowns or controls or with which it has throughput arrangements.

 

The Commercial segment includes (1) sales and deliveries ofunbranded gasoline, home heating oil, diesel, kerosene, residual oil and smallamounts of natural gas to customers in the public sector and to largecommercial and industrial customers, either through a competitive biddingprocess or through contracts of various terms, and (2) sales of customblended distillates and residual oil delivered by barges or from a terminaldock.  Commercial segment customersinclude federal and state agencies, municipalities, large industrial companies,many autonomous authorities such as transportation authorities and waterresource authorities, colleges and universities and a limited group of smallutilities.  Unlike the Wholesale segment,in the Commercial segment, the Partnership generally arranges the delivery ofthe product to the customer’s designated location, typically hiring third-partycommon carriers to deliver the product.

 

The Partnership evaluates segment performance based on net productmargins before allocations of corporate and indirect operating costs,depreciation, amortization (including non-cash charges) and interest.  Based on the way the CEO manages thebusiness, it is not reasonably possible for the Partnership to allocate thecomponents of operating costs and expenses between the reportablesegments.  Additionally, due to thecommingled nature and uses of the Partnership’s assets, it is not reasonablypossible for the Partnership to allocate assets between the two segments.  There were no intersegment sales for any ofthe periods presented below.

 

15

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Table of Contents

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 10.**     SegmentReporting (continued)

** **

Summarized financial information for the Partnership’s reportablesegments is presented in the table below (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Wholesale Segment:**                     |       |                             |       |                           |       |   |   |   |   |
| Sales                                      |       | $                                | 2,192,473  |                           | $          | 1,304,171 |   | $ | 4,789,308 |   | $ | 2,744,781 |   |
| Net product margin (1)                     |       |                             |       |                           |       |   |   |   |   |
| Distillates                                |       | $                                | 9,329      |                           | $          | 12,555 |   | $ | 32,421 |   | $ | 39,296 |   |
| Gasoline                                   |       | 10,424                           |       | 2,316                          |       | 18,968 |   | 3,934 |   |
| Residual oil                               |       | 3,234                            |       | 5,488                          |       | 7,130 |   | 15,372 |   |
| Total                                      |       | $                                | 22,987     |                           | $          | 20,359 |   | $ | 58,519 |   | $ | 58,602 |   |
| **Commercial Segment:**                    |       |                             |       |                           |       |   |   |   |   |
| Sales                                      |       | $                                | 105,236    |                           | $          | 79,919 |   | $ | 229,393 |   | $ | 212,485 |   |
| Net product margin (1)                     |       | $                                | 2,323      |                           | $          | 2,634 |   | $ | 4,929 |   | $ | 7,234 |   |
| **Combined sales and net product margin:** |       |                             |       |                           |       |   |   |   |   |
| Sales                                      |       | $                                | 2,297,709  |                           | $          | 1,384,090 |   | $ | 5,018,701 |   | $ | 2,957,266 |   |
| Net product margin (1)                     |       | $                                | 25,310     |                           | $          | 22,993 |   | $ | 63,448 |   | $ | 65,836 |   |
| Depreciation allocated to cost of sales    |       | 2,637                            |       | 1,371                          |       | 5,159 |   | 1,962 |   |
| **Combined gross profit**                  |       | $                                | 22,673     |                           | $          | 21,622 |   | $ | 58,289 |   | $ | 63,874 |   |

 

----

(1)    Net product margin is a non-GAAP financialmeasure used by management and external users of the Partnership’s consolidatedfinancial statements to assess the Partnership’s business.  The table above reconciles net product marginon a combined basis to gross profit, a directly comparable GAAP measure.

 

A reconciliation of thetotals reported for the reportable segments to the applicable line items in theconsolidated financial statements is as follows (in thousands):

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Combined gross profit**                                               |       | $                                | 22,673     |                           | $          | 21,622 |   | $ | 58,289 |   | $ | 63,874 |   |
| **Operating costs and expenses not allocated  to reportable segments:** |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative  expenses                           |       | 10,182                           |       | 11,458                         |       | 21,255 |   | 24,864 |   |
| Operating expenses                                                      |       | 8,771                            |       | 6,310                          |       | 17,796 |   | 12,200 |   |
| Amortization expenses                                                   |       | 737                              |       | 358                            |       | 1,461 |   | 716 |   |
| **Total operating costs and expenses**                                  |       | 19,690                           |       | 18,126                         |       | 40,512 |   | 37,780 |   |
| Operating income                                                        |       | 2,983                            |       | 3,496                          |       | 17,777 |   | 26,094 |   |
| Interest expense                                                        |       | (4,087                           | )          | (2,523                         | )          | (10,117 | ) | (5,839 | ) |
| Gain on sale of investment                                              |       | —                           |       | —                         |       | — |   | 14,118 |   |
| Income tax expense                                                      |       | (150                             | )          | (363                           | )          | (295 | ) | (888 | ) |
| **Net (loss) income**                                                   |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |

 

There were no foreign sales for the three and six months ended June 30,2008 and 2007.  The Partnership has noforeign assets.

 

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**Table of Contents**

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 11.**               Investment in EquitySecurities

** **

ThePartnership held an investment in NYMEX Holdings, Inc. which was accountedfor under the provisions of SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.” On March 6, 2007, the Partnership sold its investment in NYMEXHoldings, Inc. along with its NYMEX seats for approximately$15.3 million and realized a gain of approximately $14.1 million inthe consolidated statement of income for the six months ended June 30,2007.

 

**Note 12.**               Unitholders’ Equity

** **

***PrivatePlacement***

 

On March 13, 2007,the Partnership entered into a Class B Unit Purchase Agreement (the “UnitPurchase Agreement”) with Kayne Anderson MLP Investment Company and fundsmanaged by Tortoise Capital Advisors, LLC and Fiduciary Asset Management, LLC (the “Purchasers”) to sell $50.0 million of Class B units representinglimited partner interests of the Partnership in a private placement (the “PrivatePlacement”).  The Partnership issued andsold 1,785,715 Class B units to the Purchasers pursuant to the UnitPurchase Agreement on May 9, 2007. The Class B units were convertible into common units on aone-for-one basis.

 

In connection with the issuance of the Class B units,the Partnership agreed to a discount in the purchase price of approximately$0.8 million, which is the approximate amount of the product of (i) the1,785,715 Class B units, and (ii) $0.4650, the amount of thePartnership’s first quarter 2007 per unit distribution that was paid to thecommon and subordinated unitholders on May 15, 2007.  Such discount was paid by the Partnership tothe Purchasers of the Class B units substantially contemporaneously withthe payment of the Partnership’s first quarter 2007 distribution.  After giving effect to such reduction, the purchaseprice for the Class B units was approximately $49.2 million, or $27.53 perunit.  The net purchase price of the Class Bunits, after the reduction and related fees, was $49.1 million.  The net proceeds of the Class B unitswere used to partially finance the acquisition of the Albany and Newburgh, NewYork and Burlington, Vermont terminals in May 2007.  On May 22, 2007, the Class B unitsconverted into common units on one-for-one basis.

 

***Class BUnits Converted into Common Units***

 

On May 22, 2007, theClass B units converted into common units on one-for-one basis.

 

In connection with theprivate placement, the Partnership was required to take into account the effectof EITF 98-05.  As a result, a non-cash reduction in net(loss) income available to limited partners was recorded for the three and sixmonths ended June 30, 2007.  This non-cashreduction was required to be recorded pursuant to EITF 98-05 because the fair value of thePartnership’s common units on May 9, 2007 (the date on which the Class Bunits were issued) was greater than the purchase price of the Class Bunits, which was established at the time of the execution of the Unit PurchaseAgreement on March 14, 2007.  The non-cash reduction was approximately $16.4 million computed as the product of (i) the 1,785,715 Class Bunits, and (ii) the differencebetween the fair value of a common unit on the date of issuance ($36.71) andthe conversion rate after the price reduction ($27.53).  The non-cash reduction resulted in thePartnership recognizing a $16.4 million decrease in common unit equity and a correspondingincrease in Class B unit equity. Additionally, the Partnership recorded accretion of $16.4 million as a non-cash distribution to commonunitholders for the three and six months ended June 30, 2007.

 

Although EITF 98-05affected net (loss)income available to limited partners for the three and six months ended June 30, 2007, it did not affect netincome, nor did it affect total unitholders’ equity.

 

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** **

**GLOBAL PA**RTNERS LP

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 13.**               Environmental Liabilities

** **

ThePartnership currently owns or leases properties where refined petroleumproducts are being or have been handled. These properties and the refined petroleum products handled thereon maybe subject to federal and state environmental laws and regulations.  Under such laws and regulations, thePartnership could be required to remove or remediate containerized hazardousliquids or associated generated wastes (including wastes disposed of orabandoned by prior owners or operators), to clean up contaminated propertyarising from the release of liquids or wastes to the environment, includingcontaminated groundwater, or to implement best management practices to preventfuture contamination.

 

The Partnership maintains insurance of various typeswith varying levels of coverage that it considers adequate under thecircumstances to cover its operations and properties.  The insurance policies are subject todeductibles that the Partnership considers reasonable and not excessive.  In addition, the Partnership has entered intoindemnification agreements with various sellers in conjunction with several ofits acquisitions.  Allocation of environmentalliability is an issue negotiated in connection with each of the Partnership’sacquisition transactions.  In each case,the Partnership makes an assessment of potential environmental liabilityexposure based on available information. Based on that assessment and relevant economic and risk factors, thePartnership determines whether to, and the extent to which it will, assumeliability for existing environmental conditions.

 

Inconnection with the November 2007 acquisition of ExxonMobil Oil Corporation’s(“ExxonMobil”) Glenwood Landing and Inwood, New York terminals, the Partnershipassumed certain environmental liabilities, including the remediationobligations under remedial action plans submitted by ExxonMobil to and approvedby the New York Department of Environmental Conservation (“NYDEC”) with respectto both terminals.  As a result, thePartnership recorded, on an undiscounted basis, total environmental liabilitiesof approximately $1.2 million of which $0.4 million was recorded as acurrent liability and $0.8 million was recorded as a long-term liabilityon the accompanying consolidated balance sheet at June 30, 2008.  The remedial action plans submitted byExxonMobil will be implemented by Global Companies LLC.  The Partnership does not believe thatcompliance with the terms thereof will result in material costs in excess ofthe environmental reserve or have a material impact on its operations.

 

Inconnection with the May 2007 acquisition of ExxonMobil’s Albany andNewburgh, New York and Burlington, Vermont terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations undera proposed remedial action plan submitted by ExxonMobil to NYDEC with respectto the Albany, New York terminal.  As aresult, the Partnership recorded, on an undiscounted basis, total environmentalliabilities of approximately $8.0** **million,of which $0.5 million was recorded as a current liability and$7.5 million was recorded as a long-term liability on the accompanyingconsolidated balance sheet at June 30, 2008.  NYDEC has reviewed the proposed remedialaction plan submitted by ExxonMobil and provided comments to Global CompaniesLLC regarding the plan.  GlobalCompanies LLC prepared a response to NYDEC’s comments.  Subject to NYDEC’s approval of the proposedremedial action plan, the Partnership does not believe that compliance with theterms thereof will result in material costs in excess of the environmentalreserve or have a material impact on its operations.

 

Inconnection with the 2006 acquisition of its Macungie, Pennsylvania terminal(the “Global Macungie Terminal”), the Partnership assumed certain existingenvironmental liabilities at the terminal. The Partnership did not accrue for these contingencies as it believesthat the aggregate amount of these liabilities cannot be reasonably estimatedat this time.  The Partnership alsoexecuted an Administrative Order on Consent (“AOC”) with the U.S. EnvironmentalProtection Agency, Region III (“EPA, Region III”) requiring certaininvestigatory activities at the Global Macungie Terminal.  Although the Partnership cannot predict theoutcome of the investigation of the Global Macungie Terminal, based uponcurrent information, the Partnership does not anticipate that the outcome willhave a material adverse effect on it. Furthermore, the Partnership does not believe that compliance with theterms of the AOC executed by it will result in material costs or have amaterial impact on the Partnership’s operations.

 

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** **

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 13.**               Environmental Liabilities(continued)

** **

ThePartnership’s estimates used in these reserves are based on all known facts atthe time and its assessment of the ultimate remedial action outcomes.  Among the many uncertainties that impact thePartnership’s estimates are the necessary regulatory approvals for, andpotential modification of, its remediation plans, the amount of data availableupon initial assessment of the impact of soil or water contamination, changesin costs associated with environmental remediation services and equipment andthe possibility of existing legal claims giving rise to additional claims.  Therefore, although the Partnership believesthat the reserve is adequate, no assurances can be made that any costs incurredin excess of this reserve or outside of indemnifications or not otherwisecovered by insurance would not have a material adverse effect on thePartnership’s financial condition, results of operations or cash flows.

 

**Note 14.**               Long-Term Incentive Plan

** **

In October 2005, theGeneral Partner adopted a Long-Term Incentive Plan (“LTIP”) whereby 564,242common units were authorized for issuance. The LTIP provides for awards to employees, consultants and directors ofthe General Partner and employees and consultants of affiliates of thePartnership who perform services for the Partnership.  The LTIP allows for the award of unitoptions, unit appreciation rights, restricted units, phantom units anddistribution equivalent rights (“DERs”).

 

On August 14, 2007,the Compensation Committee of the board of directors of the General Partnergranted awards of phantom units and associated DERs under the LTIP to certainemployees and non-employee directors of the General Partner.  The phantom units granted will cliff vest on December 31,2009 and become payable on a one-for-one basis in common units of thePartnership (or cash equivalent) upon the achievement of certain performancegoals over the vesting period.  The DERsthat were granted in tandem with the phantom units will vest and become payablein cash simultaneously with the vesting of the phantom units.  Any phantom units and associated DERs thathave not vested as of the end of the cliff vesting period will beforfeited.  The Partnership currentlyintends and reasonably expects to issue and deliver the common units uponvesting.

 

SFAS No. 123(R) requirescompensation cost for an award of share-based employee compensation classifiedas equity, as is the case of the Partnership’s award, to be recognized over therequisite service period.  The requisiteservice period for the Partnership is from August 14, 2007, the grantdate, through December 31, 2009 (the “Requisite Service Period”).  The Partnership will recognize ascompensation expense the value of the portion of the award that is ultimatelyexpected to vest over the Requisite Service Period on a straight-linebasis.  In accordance with SFAS No. 123(R),the Partnership estimated forfeitures at the time of grant.  Such estimates, which were based on thePartnership’s service and performance history, will be revised, if necessary,in subsequent periods if actual forfeitures differ from estimates.

 

For the three and sixmonths ended June 30, 2008, the Partnership recorded compensation expense of approximately$0.2 million and $0.4 million, respectively, which is included in selling,general and administrative expenses in the accompanying consolidated statementsof operations.  The total compensationcost related to the non-vested awards not yet recognized at June 30, 2008 is approximately $1.2 millionand is expected to be recognized ratably over the remaining Requisite ServicePeriod.  The Company recorded nounit-based compensation for the three and six months ended June 30, 2007 as no other awards of anykind had been granted under the LTIP during that period.

 

**Note 15.**               Fair Value Measurements

** **

On January 1, 2008,the Partnership adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”)for its financial assets and financial liabilities.  The adoption of SFAS No. 157 did nothave a material impact on the Partnership’s fair value measurements.  SFAS No. 157 defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin the principal or most advantageous market for the asset or liability in anorderly transaction between market participants at the measurement date.

 

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**Table of Contents**

** **

**GLOBAL PARTNERS LP**

**NOTES TOCONSOLIDATE**D FINANCIALSTATEMENTS

**(Unaudited)**

** **

**Note 15.**               Fair Value Measurements(continued)

** **

SFAS No. 157establishes a fair value hierarchy, which prioritizes the inputs used inmeasuring fair value into the following three levels:

 
| Level 1 | — | Observable inputs such  as quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                               |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                          |
| Level 2 | — | Inputs other than the  quoted prices in active markets that are observable for assets or  liabilities, either directly or indirectly. These include quoted prices for  similar assets or liabilities in active markets and quoted prices for  identical or similar assets or liabilities in inactive markets. |
|    |   |                                                                                                                                                                                                                                                                                                          |
| Level 3 | — | Unobservable inputs  based on the entity’s own assumptions.                                                                                                                                                                                                                                              |

 

The following tablepresents those financial assets and financial liabilities measured at fair valueon a recurring basis as of June 30, 2008 (in thousands):

 
| ** **                                   | ** ** | **Fair Value** | ** ** | ** **                                       | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|---------------------|------------|--------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **June 30,**   | ** ** | **Fair Value Measurements Using** | ** ** |
| ** **                                   | ** ** | **2008**            | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                  |       |                |       |                                             |       |             |       |             |       |
| NYMEX contracts                              |       | $                   | 25,971     |                                             | $          | 25,971           |       | $                | —     |   | $ | — |   |
| Hedged inventories                           |       | 436,728             |       | —                                           |       | 436,728          |       | —           |       |
| Fair value of forward fixed price contracts  |       | 1,432               |       | —                                           |       | 1,432            |       | —           |       |
| Swap agreements and options                  |       | 1,885               |       | 122                                              |       | 1,763            |       | —           |       |
| Total assets                                 |       | $                   | 466,016    |                                             | $          | 26,093           |       | $                | 439,923    |   | $ | — |   |
|                                         |       |                |       |                                             |       |             |       |             |       |
| **Liabilities:**                             |       |                |       |                                             |       |             |       |             |       |
| Obligations on forward fixed price contracts |       | $                   | 35,092     |                                             | $          | —           |       | $                | 35,092     |   | $ | — |   |
| Swap agreements                              |       | 15,005              |       | —                                           |       | 15,005           |       | —           |       |
| Interest rate collar                         |       | 1,445               |       | —                                           |       | 1,445            |       | —           |       |
| Total liabilities                            |       | $                   | 51,542     |                                             | $          | —           |       | $                | 51,542     |   | $ | — |   |

 

**Note 16.**               Recent Accounting Pronouncements

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157.  This statement defines fair value,establishes guidelines for measuring fair value and requires additionaldisclosures regarding fair value measurements. SFAS No. 157applies only to fair value measurements currently required or permitted byother accounting standards and is expected to increase the consistency of thosemeasurements.  In February 2008,the FASB deferred the effective date of SFAS No. 157 for all non-financialassets and non-financial liabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually) until January 1,2009.  The Partnership is in the processof evaluating the impact of SFAS No. 157 on its non-recurring fair valuemeasurements.  The Partnership adopted SFAS No. 157on January 1, 2008 for its financial assets and liabilities measured at fair value on a recurringbasis.  The partial adoption of SFAS No. 157for financial assets and liabilities did not have a material impact on thePartnership’s consolidated financial statements.  See Note 15.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS No. 159”) which provides entitieswith an option to measure many financial instruments and certain other items atfair value that are not currently measured at fair value.  The election to use the fair value option isavailable when an entity first recognizes a financial asset or financialliability or upon entering into a firm commitment.  Subsequent changes in fair value must berecorded in earnings.  This statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. The Partnership adopted SFAS No. 159 on January 1, 2008 andelected not to use the fair value option for its existing financial assets andliabilities and, therefore, the adoption of SFAS No. 159 did not have any impact onthe Partnership’s consolidated financial statements.

 

20

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 16.**               Recent AccountingPronouncements (continued)

** **

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFASNo. 141(R)”) which retains the fundamental requirements of the originalpronouncement requiring that the purchase method be used for all businesscombinations.  SFAS No. 141(R) definesthe acquirer as the entity that obtains control of one or more businesses inthe business combination, establishes the acquisition date as the date that theacquirer achieves control and requires the acquirer to recognize the assetsacquired, liabilities assumed and any noncontrolling interest at their fairvalues as of the acquisition date.  SFAS No. 141(R) alsorequires that acquisition-related costs be recognized separately from theacquisition.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date occurs infiscal years beginning after December 15, 2008.  The Partnership is in the process ofevaluating the impact of SFAS No. 141(R) on its consolidatedfinancial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities – An Amendment of FASBStatement No. 133” (“SFAS No. 161”) which enhances therequirements under SFAS No. 133, “Accountingfor Derivatives and Hedging Activities.” SFAS No. 161 requires enhanced disclosures about an entity’sderivatives and hedging activities and how they affect an entity’s financialposition, financial performance and cash flows. SFAS No. 161 will be effective for fiscal years and interim periodsbeginning after November 15, 2008. The Partnership is in the process of evaluating the impact of SFAS No. 161on its consolidated financial statements.

 

In March 2008, theEmerging Issues Task Force approved consensus on EITF Issue No. 07-04, “Applicationof the Two-Class Method underFASB Statement No. 128 to Master Limited Partnerships” (“EITF 07-04”) which specifies the treatment ofearnings per unit calculations when incentive distributions rights exist inmaster limited partnerships.  UnderEITF 07-04, whenearnings exceed cash distributions, undistributed earnings are to be allocatedto the general partner, limited partners and holders of the incentivedistribution rights based on the distribution formula for available cash setforth in the partnership agreement. Conversely, when cash distributions exceed earnings, net income (orloss) would be reduced (or increased) by distributions to the general partner,limited partners and holders of incentive distribution rights.  The excess of distributions over earningswould be allocated to the general partner and limited partners based on theirrespective sharing of losses set forth in the partnership agreement.  EITF 07-04 will be effective for fiscal years andinterim periods beginning after December 15, 2008 and will be appliedretrospectively.  The Partnership is inthe process of evaluating the impact of EITF 07-04 on its computation of earnings per unit.

 

InApril 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  The objective of FSP FAS 142-3 is to improvethe consistency between the useful life of a recognized intangible asset underSFAS 142 and the period of expected cash flows used to measure the fairvalue of the asset under SFAS No. 141(R) and other GAAP.  FSP FAS 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. ThePartnership is in the process of evaluating the impact of FSP FAS 142-3 on its consolidated financialstatements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFASNo. 162”).  SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with GAAP in theUnited States.  SFAS No. 162 iseffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, “The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.”  The Partnership expects the adoption of SFAS No. 162will not have an impact on its consolidated financial statements.

 

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** **

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 16.**               Recent AccountingPronouncements (continued)

** **

In June 2008, theFASB issued FASB Staff Position EITF 03-6-1,“Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities”(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 states that unvested share-based payment awardsthat contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities (as defined in EITF03-06) and, therefore, shouldbe included in the computation of earnings per share pursuant to the two-classmethod.  However, the award would not beconsidered a participating security if the holder forfeits the right to receivedividends or dividend equivalents in the event that the award does notvest.  FSP EITF 03-6-1 is effective for financial statements issued forfiscal years beginning after December 15, 2008 and interim periods withinthose years.  Upon adoption, FSP EITF 03-6-1 requires that allprior-period earnings per share data presented be adjustedretrospectively.  The adoption of FSPEITF 03-6-1 is notexpected to have an impact on the Partnership’s earnings per unit because thedividend equivalent rights granted under the Partnership’s LTIP (see Note** **14) are not considered participatingsecurities.

 

**Note 17.**               Subsequent Event

** **

OnJuly 21, 2008, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit ($1.95 per unit on anannualized basis) for the period from April 1, 2008 through June 30, 2008.  On August 14, 2008, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business August 5, 2008.

 

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**Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussion and analysis of financialcondition and results of operations of Global Partners LP should be read inconjunction with the historical consolidated financial statements of GlobalPartners LP and the notes thereto included elsewhere in this Quarterly Reporton Form 10-Q.

 

**Forward-LookingStatements**

** **

ThisQuarterly Report on Form 10-Q contains certain forward-looking statementswithin the meaning of the federal securities laws.  These forward-looking statements are identified as anystatements that do not relate strictly to historical or current facts and cangenerally be identified by the use of forward-looking terminology including “may,”“believe,” “expect,” “anticipate,” “estimate,” “continue” or other similarwords.  Such statements may discussfuture expectations for, or contain projections of, results of operations, financial condition or ourability to make distributions to unitholders or state other forward-lookinginformation.  Forward-looking statementsare not guarantees of performance.  Although webelieve these forward-looking statements are based on reasonable assumptions,statements made regarding future results are subject to a number ofassumptions, uncertainties and risks, many of which are beyond our control,which may cause future results to be materially different from the resultsstated or implied in this document. These risks and uncertainties include, among other things:

 

·              Wemay not have sufficient cash from operations to enable us to pay the minimumquarterly distribution following establishment of cash reserves and payment offees and expenses, including payments to our general partner.

 

·              Asignificant decrease in demand for refined petroleum products in the areasserved by our storage facilities would reduce our ability to make distributionsto our unitholders.

 

·              Oursales of home heating oil and residual oil could be significantly reduced byconversions to natural gas which conversions could have an adverse effect onour results of operations and cash available for distribution to ourunitholders.

 

·              Warmerweather conditions could adversely affect our results of operations and cashavailable for distribution to our unitholders.

 

·              Ourrisk management policies cannot eliminate all commodity risk.  In addition, any noncompliance with our riskmanagement policies could result in significant financial losses.

 

·              Ourresults of operations are influenced by the overall forward market for refinedpetroleum products, and pricing volatility may adversely impact our results.

 

·              Weare exposed to trade credit risk, as well as risk associated with our tradecredit support, in the ordinary course of our business activities.

 

·              Dueto our lack of asset and geographic diversification, adverse developments inthe terminals that we use or in our operating areas could reduce our ability tomake distributions to our unitholders.

 

·              Weare exposed to performance risk in our supply chain.

 

·              Ourgeneral partner and its affiliates have conflicts of interest and limitedfiduciary duties, which may permit them to favor their own interests to thedetriment of unitholders.

 

·              Unitholdershave limited voting rights and are not entitled to elect our general partner orits directors or initially to remove our general partner without its consent,which could lower the trading price of our common units.

 

·              Unitholdersmay be required to pay taxes on their share of our income even if they do notreceive any cash distributions from us.

 

Additionalinformation about risks and uncertainties that could cause actual results todiffer materially from forward-looking statements is contained in Part I,Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for theyear ended December 31, 2007 and Part II, Item 1A, “Risk Factors,” in thisQuarterly Report on Form 10-Q.

 

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Allforward-looking statements included in this Form 10-Q and all subsequentwritten or oral forward-looking statements attributable to us or persons actingon our behalf are expressly qualified in their entirety by these cautionarystatements.  The forward-lookingstatements speak only as of the date made, other than as required by law, andwe undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**Overview**

** **

***General***

*** ***

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in the Northeast.  Weare one of the largest wholesale distributors of gasoline, distillates (such ashome heating oil, diesel and kerosene) and residual oil to wholesalers,retailers and commercial customers in the Northeast.  For the three and six months ended June 30,2008, we sold approximately $2.3 billion and $5.0 billion,respectively, of refined petroleum products and small amounts of natural gas.

 

Wepurchase our refined petroleum products primarily from domestic and foreignrefiners (wholesalers), traders and producers and sell these products in twosegments, Wholesale and Commercial.  Likemost independent marketers of refined petroleum products, we base our pricingon spot physical prices and routinely use the NYMEX or derivatives to hedge ourcommodity risk inherent in buying and selling energy commodities.  Through the use of regulated exchanges orderivatives, we maintain a position that is substantially balanced betweenpurchased volumes and sales volumes or future delivery obligations.  We earn a margin by selling the product forphysical delivery to third parties.

 

***Productsand Operational Structure***

*** ***

Ourproducts include gasoline, distillates and residual oil.  We sell gasoline to unbranded retail gasolinestations and other resellers of transportation fuels.  The distillates we sell are used primarilyfor fuel for trucks and off-road construction equipment and for space heatingof residential and commercial buildings. We sell residual oil to major housing units, such as public housingauthorities, colleges and hospitals and large industrial facilities that useprocessed steam in their manufacturing processes.  In addition, we sell bunker fuel, which wecan custom blend, to cruise ships, bulk carriers and fishing fleets.  We have increased our sales in thenon-weather sensitive components of our business, such as transportation fuels;however, we are still subject to the impact that warmer weather conditions mayhave on our home heating oil and residual oil sales.

 

Ourbusiness is divided into two segments:

 

·              *Wholesale.*  This segment includes sales of gasoline,distillates and residual oil to unbranded retail gasoline stations and otherresellers of transportation fuels, home heating oil retailers and wholesaledistributors.

 

·              *Commercial.*  This segment includes sales and deliveries ofunbranded gasoline, distillates, residual oil and small amounts of natural gasto customers in the public sector and to large commercial and industrialcustomers, primarily either through a competitive bidding process or throughcontracts of various terms.  This segmentalso purchases, custom blends, sells and delivers bunker fuel and diesel tocruise ships, bulk carriers and fishing fleets generally by barges.

 

Ourbusiness activities are substantially comprised of purchasing, storing,terminalling and selling refined petroleum products.  In a contango market (when product prices forfuture deliveries are higher than for current deliveries), we may use ourstorage capacity to improve our margins by storing products we have purchasedat lower prices in the current market for delivery to customers at higherprices in the future.  In a backwardatedmarket (when product prices for future deliveries are lower than currentdeliveries), we attempt to minimize our inventories to reduce commodity riskand maintain or increase net product margins. See Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-Kfor the year ended December 31, 2007 for additional informationrelated to commodity risk.

 

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*** ***

***Outlook***

*** ***

Thissection identifies certain risks and certain economic or industry-wide factorsthat may affect our financial performance and results of operations in thefuture, both in the short-term and in the long-term.  Our results of operations and financialcondition depend, in part, upon the following:

 

·              *We commit substantialresources to pursuing acquisitions, though there is no certainty that we willsuccessfully complete any acquisitions or receive the economic results weanticipate from completed acquisitions.*  Consistent with our business strategy, we arecontinuously engaged in discussions with potential sellers of terminalling,storage and/or marketing assets and related businesses.  In an effort to prudently and economicallyleverage our asset base, knowledge base and skill sets, management has alsoexpanded its efforts to pursue businesses that are closely related to orsignificantly intertwined with our existing lines of business.  Our growth largely depends on our ability tomake accretive acquisitions.  We may beunable to make such accretive acquisitions for a number of reasons, including,but not limited to, the following:  (1) weare unable to identify attractive acquisition candidates or negotiateacceptable purchase contracts; (2) we are unable to raise financing forsuch acquisitions on economically acceptable terms; or (3) we are outbidby competitors.  In addition, we mayconsummate acquisitions that at the time of consummation we believe will beaccretive, but that ultimately may not be accretive.  If any of these events were to occur, ourfuture growth would be limited.  We cangive no assurance that our current or future acquisition efforts will besuccessful or that any such acquisition will be completed on terms that arefavorable to us.

 

·              *Ourfinancial results are generally better in the first and fourth quarters of thecalendar year. *Demandfor some refined petroleum products, specifically home heating oil and residualoil for space heating purposes, is generally higher during November throughMarch than during April through October.  We obtain a significant portion of our salesduring these winter months.  Therefore,our results of operations for the first and fourth calendar quarters are generallybetter than for the second and third quarters.  With lower cash flow during the second andthird calendar quarters, we may be required to borrow money in order tomaintain current levels of distributions to our unitholders.

 

·              *Warmerweather conditions could adversely affect our results of operations andfinancial condition. *Weatherconditions generally have an impact on the demand for both home heating oil andresidual oil.  Because we supplydistributors whose customers depend on home heating oil and residual oil forspace heating purposes during the winter, warmer-than-normal temperaturesduring the first and fourth calendar quarters in the Northeast can decrease thetotal volume we sell and the gross profit realized on those sales.

 

·              *Energyefficiency, new technology and alternative fuels could reduce demand for ourproducts.*  Increased conservation andtechnological advances have adversely affected the demand for home heating oiland residual oil.  Consumption ofresidual oil has steadily declined over the last three decades.  We could face additional competition fromalternative energy sources as a result of future government-mandated controlsor regulation further promoting the use of cleaner fuels.  End users who are dual-fuel users have theability to switch between residual oil and natural gas.  Other end users may elect to convert tonatural gas.  During a period ofincreasing residual oil prices relative to the prices of natural gas, dual-fuelcustomers may switch and other end users may convert to natural gas.  Residential users of home heating oil mayalso convert to natural gas.  Suchswitching or conversion could have an adverse effect on our results ofoperations and financial condition.

 

·              Our*resultsof operations are influenced by the overall forward market for refinedpetroleum products, and pricing volatility may adversely impact our results.** ***Results from our marketing andterminalling operations are influenced by the product prices, the market forrefined petroleum products and pricing volatility.  When prices for refined petroleum productsare high, some of our customers may have insufficient credit to purchase supplyfrom us at their historical purchase volumes and their customers may adoptconservation measures which reduce consumption, thereby reducing demand forproduct.  Furthermore, when pricesincrease rapidly and dramatically, we may be unable to promptly pass ouradditional costs to our customers, resulting in lower margins for us whichcould adversely affect our results of operations.

 

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·              *New, stricterenvironmental laws and regulations could significantly increase our costs,which could adversely affect our results of operations and financial condition.*  Our operations are subject to federal, stateand local laws and regulations regulating product quality specifications andother environmental matters.  The trendin environmental regulation is towards more restrictions and limitations onactivities that may affect the environment. Our business may be adversely affected by increased costs andliabilities resulting from such stricter laws and regulations.  We try to anticipate future regulatoryrequirements that might be imposed and plan accordingly to remain in compliancewith changing environmental laws and regulations and to minimize the costs ofsuch compliance.  However, there can beno assurances as to the timing and type of such changes in existing laws or thepromulgation of new laws or the amount of any required expenditures associatedtherewith.

 

**Results of Operations**

** **

***EvaluatingOur Results of Operations***

*** ***

Our management usesa variety of financial and operational measurements to analyze ourperformance.  Thesemeasurements include: (1) net product margin, (2) gross profit, (3) selling,general and administrative expenses (“SG&A”), (4) operating expenses, (5) heatingdegree days, (6) adjusted net (loss) income per diluted limited partnerunit, (7) earnings before interest, taxes, depreciation and amortization (“EBITDA”),adjusted EBITDA and net (loss) income as adjusted for one-time gains and (8) distributablecash flow.

 

*Net Product Margin*

* *

Weview net product margin as an important performance measure of the coreprofitability of our operations.  Wereview net product margin monthly for consistency and trend analysis.  We define net product margin as our salesminus product costs.  Sales include salesof unbranded gasoline, distillates, residual oil and natural gas.  Product costs include the cost of acquiringthe refined petroleum products and natural gas that we sell and all associatedcosts including shipping and handling costs to bring such products to the pointof sale.  Net product margin is anon-GAAP financial measure used by management and external users of ourconsolidated financial statements to assess our business.  Net product margin should not be consideredas an alternative to net income, operating income, cash flow from operations,or any other measure of financial performance presented in accordance withGAAP.  In addition, our net productmargin may not be comparable to net product margin or a similarly titledmeasure of other companies.

 

*Gross Profit*

 

Wedefine gross profit as our sales minus product costs and terminal depreciationexpense allocated to cost of sales. Sales include sales of unbranded gasoline, distillates, residual oil andnatural gas.  Product costs include thecost of acquiring the refined petroleum products and natural gas that we selland all associated costs to bring such products to the point of sale.

 

*Selling, General andAdministrative Expenses*

* *

OurSG&A expenses include marketing costs, corporate overhead, employeesalaries and benefits, pension and 401(k) plan expenses, discretionarybonuses, non-interest financing costs, professional fees and informationtechnology expenses.  Employee-relatedexpenses including employee salaries, discretionary bonuses and related payrolltaxes, benefits and pension and 401(k) plan expenses are paid by ourgeneral partner which, in turn, is reimbursed for these expenses by us.

 

*Operating Expenses*

* *

Operatingexpenses are costs associated with the operation of the terminals used in ourbusiness.  Lease payments and storageexpenses, maintenance and repair, utilities, taxes, labor and labor-relatedexpenses comprise the most significant portion of our operating expenses.  These expenses remain relatively stableindependent of the volumes through our system but fluctuate slightly dependingon the activities performed during a specific period.

 

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* *

*Degree Day*

* *

A“degree day” is an industry measurement of temperature designed to evaluateenergy demand and consumption.  Degreedays are based on how far the average temperature departs from a human comfortlevel of 65°F.  Each degree oftemperature above 65°F is counted as one cooling degree day, and each degree oftemperature below 65°F is counted as one heating degree day.  Degree days are accumulated each day over thecourse of a year and can be compared to a monthly or a long-term (multi-year)average, or normal, to see if a month or a year was warmer or cooler thanusual.  Degree days are officiallyobserved by the National Weather Service and officially archived by theNational Climatic Data Center.  Forpurposes of evaluating our results of operations, we use the normal heatingdegree day amount as reported by the National Weather Service at its LoganInternational Airport station in Boston, Massachusetts.

 

*AdjustedNet (Loss) Income Per Diluted Limited Partner Unit*

 

Weuse adjusted net (loss) income per diluted limited partner unit to measure ourfinancial performance on a per-unit basis. Adjusted net (loss) income per diluted limited partner unit is definedas net (loss) income after adding back the theoretical amount allocated to thegeneral partner’s interest as provided under EITF 03-06 and a non-cashreduction in net (loss) income available to limited partners underEITF 98-05, divided by the weighted average number of outstanding dilutedcommon and subordinated units, or limited partner units, during the period.

 

Net(loss) income per diluted limited partner unit as dictated by EITF 03-06is theoretical and pro forma in nature and does not reflect the economicprobabilities of whether earnings for an accounting period would or could bedistributed to unitholders.  Thepartnership agreement does not provide for the quarterly distribution of netincome; rather, it provides for the distribution of available cash, which is acontractually defined term that generally means all cash on hand at the end ofeach quarter after establishment of sufficient cash reserves required tooperate our business.  Accordingly, thedistributions we historically paid and will pay in future periods are notimpacted by net (loss) income per diluted limited partner unit as dictated byEITF 03-06.

 

Thenon-cash reduction under EITF 98-05 for the three and six months ended June 30,2007 was the result of accounting for the sale of Class B units (seeNote 12 of Notes to Consolidated Financial Statements).  Although EITF 98-05 affected net (loss)income available to limited partners, it did not affect net income ordistributable cash flow to limited partners, nor did it affect totalunitholders’ equity.

 

Adjustednet (loss) income per diluted limited partner unit is a non-GAAP financialmeasure and should not be considered as an alternative to net (loss) income perdiluted limited partner unit or any other measure of financial performancepresented in accordance with GAAP.  Inaddition, our adjusted net (loss) income per diluted limited partner unit maynot be comparable to the adjusted net (loss) income per diluted limited partnerunit or similarly titled measure of other companies.

 

*EBITDA, Adjusted EBITDAand Net (Loss) Income as Adjusted for One-time Gains*

* *

EBITDA,adjusted EBITDA and net (loss) income as adjusted for one-time gains are usedas supplemental financial measures by management and external users of ourconsolidated financial statements, such as investors, commercial banks andresearch analysts, to assess:

 

·              ourcompliance with certain financial covenants included in our debt agreements;

 

·              ourfinancial performance without regard to financing methods, capital structure,income taxes or historical cost basis;

 

·              our abilityto generate cash sufficient to pay interest on our indebtedness and to makedistributions to our partners;

 

·              ouroperating performance and return on invested capital as compared to those ofother companies in the wholesale marketing and distribution of refinedpetroleum products business, without regard to financing methods and capitalstructure; and

 

·              theviability of acquisitions and capital expenditure projects and the overallrates of return of alternative investment opportunities.

 

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AdjustedEBITDA and net (loss) income as adjusted for one-time gains reflect theexclusion of the $14.1 million gain on investment for the six months endedJune 30, 2007 (see Note 11 of Notes to Consolidated FinancialStatements).  EBITDA, adjusted EBITDA andnet (loss) income as adjusted for one-time gains should not be consideredalternatives to net income, operating income, cash flow from operatingactivities or any other measure of financial performance or liquidity presentedin accordance with GAAP.  EBITDA,adjusted EBITDA and net (loss) income as adjusted for one-time gains excludesome, but not all, items that affect net income, and these measures may vary amongother companies.  Therefore, EBITDA,adjusted EBITDA and net (loss) income as adjusted for one-time gains may not becomparable to similarly titled measures of other companies.

 

*Distributable Cash Flow*

* *

Distributablecash flow is an important non-GAAP financial measure for our limited partnerssince it serves as an indicator of our success in providing a cash return ontheir investment.  Specifically, thisfinancial measure indicates to investors whether or not we have generatedsufficient cash flow on a current or historic level that can sustain or supportan increase in our quarterly cash distribution. Distributable cash flow is a quantitative standard used by theinvestment community with respect to publicly traded partnerships.  Distributable cash flow reflects theexclusion of the $14.1 million gain on investment for the six months endedJune 30, 2007 (see Note 11 of Notes to Consolidated FinancialStatements).  Distributable cash flow isa non-GAAP financial measure and should not be considered as an alternative tonet income, cash flow from operations, or any other measure of financialperformance presented in accordance with GAAP. In addition, our distributable cash flow may not be comparable todistributable cash flow or similarly titled measure of other companies.

 

***Threeand Six Months Ended June 30, 2008 and 2007***

*** ***

In the second quarter and for the first six months of 2008, weexperienced the following events which, we believe, led to a significantnegative impact on our results of operations:

 

1.               Refinedpetroleum product prices continued to rise which we believe contributed to:

 

·                  higherfinancing costs as a result of increased borrowings to finance inventory;

 

·                  theconversion by end users to other products (primarily natural gas) from residualfuel and heating oil; and

 

·                  energyconservation.

 

2.               Adecrease in demand for distillates and residual oil due to energy conservation and a decline in heatingdegree days led to lower volumes sold and lower margins.

 

3.               Adversemarket conditions in our markets, including volatility and backwardation, ledto lower margins and intensified competition from other wholesalers.

 

4.               Temperaturesfor the second quarter and first six months of 2008 were warmer than normal andwarmer than the same periods in 2007.

 

5.               Wehad fewer fixed priced sales of heating oil in the second quarter and first sixmonths of 2008 than in comparable prior periods.

 

Inaddition, during the first quarter of 2008, we experienced the following events which, we believe, led to asignificant negative impact on our results of operations for the six monthsended June 30, 2008:

 

1.               Theopportunistic conversion of certain gasoline markets to ethanol put us in atemporarily disadvantaged competitive position while our terminalinfrastructure was being converted.

 

2.               Temporarylogistical supply issues related to rail capacity continued into the firstquarter of 2008 which adversely affected the performance of our Burlington,Vermont facility.

 

***During the three and six months ended June 30, 2008, weexperienced higher revenues and higher gasoline sales volumes, primarily due toour 2007 acquisitions of five refined petroleum products terminals fromExxonMobil.  Refined petroleum productand natural gas prices continued to rise during the three and six months ended June 30,2008 compared to the same periods in 2007. Temperatures were 8% warmer and 6% warmer than normal for the three andsix months ended June 30, 2008, respectively, and 12% warmer and 8% warmerfor the three and six months ended June 30, 2008, respectively, comparedto the same periods last year, as measured by aggregate heating degree days.***

*** ***

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***KeyPerformance Indicators***

*** ***

Thefollowing table provides a summary of some of the key performance indicatorsthat may be used to assess our results of operations.  These comparisons are not necessarilyindicative of future results (dollars and gallons in thousands, except per unitamounts):

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income as adjusted for one-time gains (1)            |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 19,367 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| Adjusted net (loss) income per diluted limited partner unit (2) |       | $                                | (0.09      | )                              | $          | 0.05 |   | $ | 0.56 |   | $ | 2.90 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| Adjusted EBITDA (3)                                             |       | $                                | 6,793      |                           | $          | 5,563 |   | $ | 25,269 |   | $ | 29,430 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| Distributable cash flow (4)                                     |       | $                                | 2,248      |                           | $          | 1,577 |   | $ | 14,057 |   | $ | 20,836 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Wholesale Segment:**                                          |       |                             |       |                           |       |   |   |   |   |
| Volume (gallons)                                                |       | 688,825                          |       | 630,155                        |       | 1,691,148 |   | 1,440,977 |   |
| Sales                                                           |       | $                                | 2,192,473  |                           | $          | 1,304,171 |   | $ | 4,789,308 |   | $ | 2,744,781 |   |
| Net product margin (5)                                          |       |                             |       |                           |       |   |   |   |   |
| Distillates                                                     |       | $                                | 9,329      |                           | $          | 12,555 |   | $ | 32,421 |   | $ | 39,296 |   |
| Gasoline                                                        |       | 10,424                           |       | 2,316                          |       | 18,968 |   | 3,934 |   |
| Residual oil                                                    |       | 3,234                            |       | 5,488                          |       | 7,130 |   | 15,372 |   |
| Total                                                           |       | $                                | 22,987     |                           | $          | 20,359 |   | $ | 58,519 |   | $ | 58,602 |   |
| **Commercial Segment:**                                         |       |                             |       |                           |       |   |   |   |   |
| Volume (gallons)                                                |       | 41,768                           |       | 53,223                         |       | 103,579 |   | 148,773 |   |
| Sales                                                           |       | $                                | 105,236    |                           | $          | 79,919 |   | $ | 229,393 |   | $ | 212,485 |   |
| Net product margin (5)                                          |       | $                                | 2,323      |                           | $          | 2,634 |   | $ | 4,929 |   | $ | 7,234 |   |
| **Combined sales and net product margin:**                      |       |                             |       |                           |       |   |   |   |   |
| Sales                                                           |       | $                                | 2,297,709  |                           | $          | 1,384,090 |   | $ | 5,018,701 |   | $ | 2,957,266 |   |
| Net product margin (5)                                          |       | $                                | 25,310     |                           | $          | 22,993 |   | $ | 63,448 |   | $ | 65,836 |   |
| Depreciation allocated to cost of sales                         |       | 2,637                            |       | 1,371                          |       | 5,159 |   | 1,962 |   |
| **Combined gross profit**                                       |       | $                                | 22,673     |                           | $          | 21,622 |   | $ | 58,289 |   | $ | 63,874 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Weather conditions:**                                         |       |                             |       |                           |       |   |   |   |   |
| Normal heating degree days                                      |       | 784                              |       | 784                            |       | 3,685 |   | 3,654 |   |
| Actual heating degree days                                      |       | 721                              |       | 817                            |       | 3,449 |   | 3,735 |   |
| Variance from normal heating degree days                        |       | (8                               | )%         | 4                              | %          | (6 | )% | 2 | % |
| Variance from prior period actual heating degree days           |       | (12                              | )%         | 7                              | %          | (8 | )% | 10 | % |

 

----

(1)    Net(loss) income as adjusted for one-time gains is a non-GAAP financial measurewhich is discussed above under “—EvaluatingOur Results of Operations.”  The tablebelow presents a reconciliation of net (loss) income as adjusted for one-timegains to the most directly comparable GAAP financial measure.

(2)    Adjustednet (loss) income per diluted limited partner unit is a non-GAAP financialmeasure which is discussed above under “—EvaluatingOur Results of Operations.”  The tablebelow presents a reconciliation of adjusted net (loss) income per dilutedlimited partner unit to the most directly comparable GAAP financial measure.

(3)    AdjustedEBITDA is a non-GAAP financial measure which is discussed above under “—EvaluatingOur Results of Operations.”  The tablebelow presents reconciliations of adjusted EBITDA to the most directlycomparable GAAP financial measures.

(4)    Distributablecash flow is a non-GAAP financial measure which is discussed above under “—EvaluatingOur Results of Operations.”  The tablebelow presents reconciliations of distributable cash flow to the most directlycomparable GAAP financial measures.

(5)    Netproduct margin is a non-GAAP financial measure which is discussed above under “—EvaluatingOur Results of Operations.”  The tableabove reconciles net product margin on a combined basis to gross profit, adirectly comparable GAAP financial measure.

 

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The following table presents a reconciliation of net(loss) income as adjusted for one-time gains to the most directly comparableGAAP financial measure on a historical basis for each period presented:

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Reconciliation of net (loss) income to net  (loss) income as adjusted for one-time gains:** |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                                                                             |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |
| Gain on sale of investment                                                                    |       | —                           |       | —                         |       | — |   | (14,118 | ) |
| Net (loss) income as adjusted for one-time gains                                              |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 19,367 |   |

 

The following table presents a reconciliation ofadjusted net (loss) income per diluted limited partner unit to the mostdirectly comparable GAAP financial measure on a historical basis for eachperiod presented:

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Reconciliation of net (loss) income per diluted  limited partner unit to adjusted net (loss) income per diluted limited  partner unit:** |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income per diluted limited partner unit under  EITF 03-06 and EITF 98-05                                              |       | $                                | (0.09      | )                              | $          | (1.28 | ) | $ | 0.54 |   | $ | 0.47 |   |
| Dilutive impact of theoretical distribution of earnings under  EITF 03-06                                                             |       | —                           |       | —                         |       | 0.02 |   | 1.10 |   |
| Dilutive impact of non-cash reduction under EITF 98-05                                                                                |       | —                           |       | 1.33                           |       | — |   | 1.33 |   |
| Adjusted net (loss) income per diluted limited partner unit                                                                                |       | $                                | (0.09      | )                              | $          | 0.05 |   | $ | 0.56 |   | $ | 2.90 |   |

 

The following tablepresents reconciliations of EBITDA and adjusted EBITDA to the most directlycomparable GAAP financial measures on a historical basis for each periodpresented (in thousands):

 
| ** **                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Reconciliation of net (loss) income to EBITDA  and Adjusted EBITDA:**                                    |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                                                                                          |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |
| Depreciation and amortization                                                                              |       | 3,810                            |       | 2,067                          |       | 7,492 |   | 3,336 |   |
| Interest expense                                                                                           |       | 4,087                            |       | 2,523                          |       | 10,117 |   | 5,839 |   |
| Income tax expense                                                                                         |       | 150                              |       | 363                            |       | 295 |   | 888 |   |
| EBITDA                                                                                                     |       | 6,793                            |       | 5,563                          |       | 25,269 |   | 43,548 |   |
| Gain on sale of investment                                                                                 |       | —                           |       | —                         |       | — |   | (14,118 | ) |
| Adjusted EBITDA                                                                                            |       | $                                | 6,793      |                           | $          | 5,563 |   | $ | 25,269 |   | $ | 29,430 |   |
|                                                                                                       |       |                             |       |                           |       |   |   |   |   |
| **Reconciliation of cash flow (used in) provided  by operating activities to EBITDA and Adjusted EBITDA:** |       |                             |       |                           |       |   |   |   |   |
| Cash flow (used in) provided by operating activities                                                       |       | $                                | (103,790   | )                              | $          | (39,431 | ) | $ | (5,973 | ) | $ | 101,297 |   |
| Net changes in operating assets and liabilities                                                            |       | 106,346                          |       | 42,108                         |       | 20,830 |   | (64,476 | ) |
| Interest expense                                                                                           |       | 4,087                            |       | 2,523                          |       | 10,117 |   | 5,839 |   |
| Income tax expense                                                                                         |       | 150                              |       | 363                            |       | 295 |   | 888 |   |
| EBITDA                                                                                                     |       | 6,793                            |       | 5,563                          |       | 25,269 |   | 43,548 |   |
| Gain on sale of investment                                                                                 |       | —                           |       | —                         |       | — |   | (14,118 | ) |
| Adjusted EBITDA                                                                                            |       | $                                | 6,793      |                           | $          | 5,563 |   | $ | 25,269 |   | $ | 29,430 |   |

 

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The following table presents reconciliations ofdistributable cash flow to the most directly comparable GAAP financial measureson a historical basis for each period presented (in thousands):

 
| ** **                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Reconciliation of net (loss) income to  distributable cash flow:**                                    |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                                                                                       |       | $                                | (1,254     | )                              | $          | 610 |   | $ | 7,365 |   | $ | 33,485 |   |
| Depreciation and amortization                                                                           |       | 3,810                            |       | 2,067                          |       | 7,492 |   | 3,336 |   |
| Gain on sale of investment                                                                              |       | —                           |       | —                         |       | — |   | (14,118 | ) |
| Maintenance capital expenditures                                                                        |       | (308                             | )          | (1,100                         | )          | (800 | ) | (1,867 | ) |
| Distributable cash flow                                                                                 |       | $                                | 2,248      |                           | $          | 1,577 |   | $ | 14,057 |   | $ | 20,836 |   |
|                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| **Reconciliation of cash flow (used in) provided  by operating activities to distributable cash flow:** |       |                             |       |                           |       |   |   |   |   |
| Cash flow (used in) provided by operating activities                                                    |       | $                                | (103,790   | )                              | $          | (39,431 | ) | $ | (5,973 | ) | $ | 101,297 |   |
| Net changes in operating assets and liabilities                                                         |       | 106,346                          |       | 42,108                         |       | 20,830 |   | (64,476 | ) |
| Gain on sale of investment                                                                              |       | —                           |       | —                         |       | — |   | (14,118 | ) |
| Maintenance capital expenditures                                                                        |       | (308                             | )          | (1,100                         | )          | (800 | ) | (1,867 | ) |
| Distributable cash flow                                                                                 |       | $                                | 2,248      |                           | $          | 1,577 |   | $ | 14,057 |   | $ | 20,836 |   |

 

***Consolidated Results***

 

Ourtotal sales for the second quarter of 2008 increased by $913.6 million, or66%, to $2,297.7 million compared to $1,384.1 million for the same periodin 2007.  The increase was driven primarily by higher refined petroleum productprices for the three months ended June 30, 2008 compared to the sameperiod in 2007 and our terminal acquisitions in Albany and Newburgh, New Yorkand Burlington, Vermont in May 2007 and in Glenwood Landing and Inwood,New York in November 2007.  Ouraggregate volume of product sold increased by approximately 47 million gallons, or 7%, to 731** **milliongallons.  The increase in volume is dueto an increase of approximately 103 million gallons in gasoline, mostly due to our 2007 terminalacquisitions, offset by decreases of 38 million and 17 milliongallons in distillates and residual oil, respectively.  These decreases were primarily due toconservation by users of home heating oil, warmer-than-normal weather andconversion and fuel switching related to increased residual oil prices relativeto the prices of natural gas and intensified competition in themarketplace.  The number of actual heating degree days decreased 12% to 721 for thequarter ended June 30, 2008 compared with 817 for the same period in2007.  Our gross profit for thesecond quarter of 2008 was $22.7** **million,an increase of $1.1** **million,or 5%, compared to $21.6** **millionfor the same period in 2007.  The increasewas primarily due to a higher net product margin in our Wholesale segment forgasoline, offset by lower net product margins in distillates and residual oiland an increase in depreciation on our terminals, which is included in cost ofsales, as a result of our 2007 terminal acquisitions.

 

Ourtotal sales for the six months ended June 30, 2008 increased by$2,061.4 million, or 70%, to $5,018.7 million compared to$2,957.3 million for the same period in 2007.  Theincrease was driven primarily by higher refined petroleum product prices forthe six months ended June 30, 2008 compared to the same period in 2007 andour 2007 terminal acquisitions.  Ouraggregate volume of product sold increased by approximately 205 million gallons, or 13%, to 1,795** **million gallons.  The increase in volume is due to an increaseof approximately 279 milliongallons in gasoline, mostly due to our 2007 terminal acquisitions,offset by decreases of 26 million and 45 million gallons indistillates and residual oil, respectively. These decreases were primarily due to conservation by users of homeheating oil, warmer-than-normal weather and conversion and fuel switchingrelated to increased residual oil prices relative to the prices of natural gasand intensified competition in the marketplace. The number of actual heatingdegree days decreased 8% to 3,449 for the six months ended June 30, 2008compared with 3,735 for the same period in 2007.  Our gross profit for the six months ended June 30, 2008 was$58.3** **million, a decrease of $5.6** **million, or 9%, compared to $63.9** **millionfor the same period in 2007.  Thedecrease was primarily due to lower net product margins in distillates andresidual oil and an increase in depreciation on our terminals, which isincluded in cost of sales, as a result of our 2007 terminal acquisitions.  The decrease was significantly offset by ahigher net product margin in our Wholesale segment for gasoline.

 

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*Wholesale Segment*

* *

Distillates.  Wholesale distillate sales for the threemonths ended June 30, 2008 were $883.6 million compared to$584.1 million for the three months ended June 30, 2007.  During the first six months of 2008,wholesale distillate sales were $2,487.0 million compared to$1,632.9 million for the same period in 2007.  The increases of $299.5 million, or 51%,and $854.1 million, or 52%, for the three and six months ended June 30,2008, respectively, were due to significant increases in refined petroleumproduct prices for the three and six months ended June 30, 2008 comparedto the same periods in 2007.  Although we experienced increases indistillate sales, our distillate volume sold was negatively impacted by thehigher price for heating oil, warmer temperatures, meaningful energyconservation and unfavorable forward pricing. Primarily due to these same factors, our net product margin contributionfrom distillate sales decreased by $3.2 million, or 26%, to $9.3 million for the three months ended June 30, 2008 and by $6.9 million, or 17%, to $32.4 million for the six months ended June 30,2008 compared to the same periods in 2007. This decrease in net product margin for Wholesale distillates also reflectsan increase of $2.5 million related to a change in estimate of our inventoryreserve account for the three and six months ended June 30, 2008.

 

Gasoline.  Wholesale gasoline sales for the three monthsended June 30, 2008 were $1,283.7 million compared to$698.0 million for the same period in 2007.  During the first six months of 2008,wholesale gasoline sales were $2,258.7 million compared to$1,079.3 million for the same period in 2007.  The increasesof $585.6 million, or 84%, and$1,179.4 million, or 109%, for the three and six months ended June 30,2008, respectively, were dueprimarily to our 2007 terminal acquisitions, an increase in gasoline volumesold and higher prices.  Our net product margin contributionfrom gasoline sales increased by $8.1 million to $10.4 million forthe three months ended June 30, 2008 and by $15.0 million,or 382%, to $19.0 millionfor the six months ended June 30, 2008 compared to the same periodsin 2007, attributable to the new business generated by our 2007 terminal acquisitions,as well as better margins in our pre-acquisition gasoline business.  Although we experienced increases in gasolinesales, volume sold and net product margin, these results were negativelyimpacted for the six months ended June 30, 2008 as a result of thefollowing first quarter 2008 events: 1) the opportunistic conversion ofcertain gasoline markets to ethanol which put us in a temporarily disadvantagedcompetitive position while our terminal infrastructure was being converted; and2) the temporary logistical supply issues related to rail capacity whichadversely affected the performance of our Burlington, Vermont facility.  We have since successfully completed theconversion to ethanol at our facilities which are now fully operational andfull rail service to our Burlington, Vermont facility has resumed.

 

ResidualOil.  Wholesale residualoil sales for the three months ended June 30, 2008 were $25.2 millioncompared to $22.1 million for the three months ended June 30,2007.  During the first six months of2008, residual oil sales were $43.6 million compared to $32.7 millionfor the same period in 2007.  Theincreases of $3.1 million, or 14%, and $10.9 million, or 33%, for thethree and six months ended June 30, 2008, respectively, were primarily dueto an increase in refined petroleum product prices.  Our net product margincontribution from residual oil sales decreased by $2.3 million, or 41%, to$3.2 million for the three months ended June 30, 2008 and by $8.2 million, or 54%, to $7.1 million for the six months ended June 30,2008 compared to the same periods in 2007 due to conversion and fuelswitching related to increased residual oil prices relative to the prices ofnatural gas and intensified competition in the marketplace.

 

*Commercial Segment*

* *

Inour Commercial segment, residual oil accounted for approximately 63% and 74% oftotal commercial volume sold for the three months ended June 30, 2008 and2007, respectively, and approximately 68% and 78% of total commercial volumesold for the six months ended June 30, 2008 and 2007, respectively.  Distillates, gasoline and natural gasaccounted for the remainder of the total volume sold.

 

Commercialresidual oil sales for the quarter ended June 30, 2008 increased by 11%compared to the same period in 2007, despite a 33% decrease in volumesold.  For the six months ended June 30,2008, residual oil sales decreased by 3% compared to the same period in 2007due to a 39% decrease in volume sold.  Weattribute the decreases in volume sold to the competitive pricing from naturalgas and reductions in production by certain industry participants in ourterritory.

 

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*Selling, General and Administrative Expenses*

 

SG&Aexpenses decreased by $1.3 million, or 11%, to $10.2 million for thethree months ended June 30, 2008 compared to $11.5 million for thesame period in 2007.  The decrease wasprimarily due to decreases of $0.6 million in accrued bonuses,$0.3 million in professional fees and $0.6 million in other SG&Aexpenses, offset by an increase of $0.2 million in compensation cost onour long-term incentive plan.

 

SG&Aexpenses decreased by $3.6 million, or 15%, to $21.3 million for thesix months ended June 30, 2008 compared to $24.9 million for the sameperiod in 2007.  The decrease wasprimarily due to decreases of $3.1 million in accrued bonuses,$0.5 million in professional fees, $0.2 million in legal fees as aresult of reimbursements from insurance carriers for previously expensed legalfees and $0.9 million in other SG&A expenses, offset by increases of$0.7 million in salaries, partly due to additional employees to supportour terminal acquisitions, and $0.4 million in compensation cost on ourlong-term incentive plan.

 

*Operating Expenses*

* *

Operatingexpenses increased by $2.5 million, or 39%, to $8.8 million for thethree months ended June 30, 2008 compared to $6.3 million for thesame period in 2007.  The increase wasprimarily due to $1.2 million in costs associated with operating ourAlbany and Newburgh, New York and Burlington, Vermont terminals acquired in May 2007,$1.0 million in costs associated with operating our Glenwood Landing andInwood, New York terminals acquired in November 2007 and $0.3 millionin costs associated with our leased terminal in Providence, Rhode Island.

 

Operatingexpenses increased by $5.6 million, or 46%, to $17.8 million for thesix months ended June 30, 2008 compared to $12.2 million for the sameperiod in 2007.  The increase wasprimarily due to $2.6 million in costs associated with operating ourAlbany and Newburgh, New York and Burlington, Vermont terminals acquired in May 2007,$2.2 million in costs associated with operating our Glenwood Landing andInwood, New York terminals acquired in November 2007, $0.6 million incosts associated with our leased terminal in Providence, Rhode Island and$0.2 million in other operating expenses.

 

***Interest Expense***

*** ***

Interestexpense for the three months ended June 30, 2008 increased by$1.6 million, or 64%, to $4.1 million compared to $2.5 millionfor the same period in 2007.  Interestexpense for the six months ended June 30, 2008 increased by$4.3 million, or 73%, to $10.1 million compared to $5.8 millionfor the same period in 2007.  Weattribute the increases primarily to increased refined petroleum product priceswhich resulted in higher average balances on our working capital creditfacility that were required to carry higher average balances on inventories andaccounts receivable.  In addition, we hadincreased borrowings on our working capital and acquisition facilities to fundour 2007 terminal acquisitions.

 

***Gain on Sale of Investment***

*** ***

***In March 2007, we sold our***investment in NYMEX Holdings, Inc. along with our NYMEX seats forapproximately $15.3 million and realized a gain of approximately$14.1 million for the six months ended June 30, 2007.

*** ***

**Liquidity and CapitalResources**

** **

***Liquidity***

** **

Ourprimary liquidity needs are to fund our working capital requirements and ourcapital expenditures.  Cash generatedfrom operations and our working capital revolving credit facility provide ourprimary sources of liquidity.  Workingcapital increased by $132.1 million to $303.1 million at June 30,2008 compared to $171.0 million at December 31, 2007.

 

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On February 14, 2008, we paida cash distribution to our common and subordinated unitholders and our generalpartner of approximately $6.5 million for the fourth quarter of 2007, andon May 15, 2008, we paid a cash distribution to our common andsubordinated unitholders and our general partner of approximately $6.5 millionfor the first quarter of 2008.  On July 21,2008, the board of directors of our general partner declared a quarterly cashdistribution of $0.4875 per unit for the period from April 1,2008 through June 30, 2008 ($1.95 per unit on an annualized basis) to ourcommon and subordinated unitholders of record as of the close of business August 5, 2008.  We expect to pay the cash distribution of approximately$6.5 million on August 14, 2008.

 

***CapitalExpenditures***

*** ***

Ourterminalling operations require investments to expand, upgrade and enhanceexisting operations and to meet environmental and operations regulations.  Our capital requirements primarily consist ofmaintenance capital expenditures and expansion capital expenditures.  Maintenance capital expenditures representcapital expenditures to replace partially or fully depreciated assets tomaintain the operating capacity of, or sales generated by, existing assets andextend their useful lives, such as expenditures required to maintain equipmentreliability, tankage and pipeline integrity and safety, and to addressenvironmental regulations.  We hadapproximately $0.8 million and $1.9 million in maintenance capitalexpenditures for the six months ended June 30, 2008 and 2007,respectively, which are included in capital expenditures in the accompanyingconsolidated statements of cash flows. Repair and maintenance expenses associated with existing assets that areminor in nature and do not extend the useful life of existing assets arecharged to operating expenses as incurred.

 

Expansioncapital expenditures include expenditures to acquire assets to grow ourbusiness and to expand existing facilities, such as projects that increaseoperating capacity by increasing tankage or adding terminals.  We generally fund our expansion capitalexpenditures through our acquisition and working capital revolving creditfacilities or by issuing additional equity. We had approximately $4.7 million and $103.8 million inexpansion capital expenditures for the six months ended June 30, 2008 and2007, respectively, to increase our operating capacity and capabilities.  Specifically, for the six months ended June 30,2008, expansion capital expenditures consisted of $2.7 million inexpenditures related to construction in process on our newly leased terminal inProvidence, Rhode Island, $1.1 million related to conversion expendituresto handle ethanol-based gasoline and $0.9 million in other expansioncapital expenditures.  For the six monthsended June 30, 2007, expansion capital expenditures consisted of$102.6 million in terminal acquisitions for the Albany and Newburgh, NewYork and Burlington, Vermont terminals acquired in May of 2007 and$1.2 million in other expansion capital expenditures.

 

Weanticipate that maintenance capital expenditures will be funded with cashgenerated by operations.  We believe thatwe will have sufficient liquid assets, cash flow from operations, borrowingcapacity under our credit agreement and the ability to issue additional commonunits and/or debt securities under our shelf registration statement to meet ourfinancial commitments, debt service obligations, contingencies and anticipatedcapital expenditures.  However, we aresubject to business and operational risks that could adversely affect our cashflow.  A material decrease in our cashflows would likely produce an adverse effect on our borrowing capacity.

 

***CashFlow***

*** ***

Thefollowing table summarizes cash flow activity (in thousands):

 
| ** **                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30 31,**      | ** ** |
| ** **                                          | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                                                |       |                           |       |   |   |
| Net cash (used in) provided by operating activities |       | $                              | (5,973     | ) | $ | 101,297 |   |
| Net cash used in investing activities               |       | $                              | (5,510     | ) | $ | (90,375 | ) |
| Net cash provided by (used in) financing activities |       | $                              | 11,793     |   | $ | (12,256 | ) |

 

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Cashflow from operating activities generally reflects the purchasing patterns ofinventory, the timing of collections on our accounts receivable, the seasonalityof our business, fluctuations in refined petroleum product prices, our workingcapital requirements related to acquisitions and general market conditions.

 

Netcash used in operating activities increased by $107.3 million for the sixmonths ended June 30, 2008 compared to the same period in 2007 and wasprimarily reflected by the following (i) the $26.1 million decreasein net income offset by $14.1 million representing the gain on the sale ofour NYMEX Holdings, Inc. shares and related NYMEX seats in the firstquarter of 2007; (ii) a change of $107.5 million in accountsreceivable, offset by changes of $51.7** **millionin inventories, $51.2** **millionin accounts payable and $13.5 million in accrued expenses and othercurrent liabilities, primarily the result of our 2007 terminal acquisitions andincreases in refined petroleum product prices year over year, and $12.7** **million in prepaid expenses and (iii) an$83.2 million change in the fair value of our forward fixed pricecontracts and other derivatives.  For thesix months ended June 30, 2008, contracts supporting our forward fixedprice hedge program required margin payments of approximately $7.5 millionto the New York Mercantile Exchange dueto market direction while for the six months ended June 30, 2007,similar hedging activity provided funds of approximately $75.7 million.

 

Netcash used in investing activities decreased by $84.9 million for the sixmonths ended June 30, 2008 compared to the same period in 2007 andincluded $5.5 million in total capital expenditures comprised of$0.8 million in maintenance capital expenditures and $4.7 million inexpansion capital expenditures ($2.7 million related to construction inprocess on our leased terminal in Providence, Rhode Island, $1.1 millionrelated to conversion expenditures to handle ethanol-based gasoline and$0.9 million in other expansion capital expenditures).  Comparatively, for the six months ended June 30,2007, we had $105.7 million in total capital expenditures comprised of$1.9 million in maintenance capital expenditures and $103.8 millionin expansion capital expenditures ($102.6 million to acquire the Albanyand Newburgh, New York and Burlington, Vermont terminals and $1.2 millionin other expansion capital expenditures), and received proceeds of$15.3 million from the sale of our investment NYMEX Holdings, Inc.and related seats.

 

Netcash provided by financing activities increased by $24.0 million for thesix months ended June 30, 2008 compared to the same period in 2007 andincluded net proceeds from our credit facilities of $26.1 million, offsetby $13.1 million in cash distributions to our common and subordinatedunitholders and our general partner and $1.2 million in payments on ournote payable.  Comparatively, for the sixmonths ended June 30, 2007, net cash used in financing activities includednet payments in our credit facilities of $50.6 million, and$10.6 million in cash distributions to our common and subordinatedunitholders and our general partner, offset by net proceeds of $49.1 millionfrom the issuance of Class B units.

 

***Credit Agreement***

 

We,our general partner, our operating company and our operating subsidiaries havea four-year senior secured credit agreement with total available commitments of$750.0 million.  We repay amountsoutstanding and reborrow funds based on our working capital requirements and,therefore, classify as a current liability the portion of the working capitalrevolving credit facility we expect to pay down during the course of the year.  The long-term portion of the working capitalrevolving credit facility is the amount we expect to be outstanding during theentire year.  The credit agreement willmature on April 22, 2011.  There arethree facilities under our credit agreement:

 

·      aworking capital revolving credit facility to be used for working capitalpurposes and letters of credit in the principal amount equal to the lesser ofour borrowing base and $650.0 million, of which two $50.0 millionseasonal overline facilities are available each year only during the periodbetween September 1 and June 30 (on July 21, 2008, the creditagreement was amended to reinstate the seasonal overline period from July 21,2008 through August 31, 2008 as further discussed below);

 

·      an$85.0 million acquisition facility to be used for funding acquisitionssimilar to our business line that have a purchase price of $25.0 millionor less or $35.0 million or less in the aggregate in any 12-month period;and

 

·      a$15.0 million revolving credit facility to be used for general purposes,including payment of distributions to our unitholders.

 

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Inaddition, provided no Event of Default (as defined in the credit agreement) thenexists, we may request to increase:  (1) theacquisition facility by up to another $50.0 million, for a totalacquisition facility of up to $135.0 million; and (2) the working capitalrevolving credit facility by up to another $100.0 million, for atotal working capital revolving credit facility of up to $750.0 million.  Any such request for an increase by us mustbe in a minimum amount of $5.0 million, and no more than three suchrequests may be made for each facility.

 

Duringthe period from January 1, 2008 through June 30, 2008, borrowingsunder our working capital revolving credit, acquisition and revolving creditfacilities bore interest at our option at (1) the Eurodollar rate, plus1%, 11⁄2% and 11⁄2%, respectively, (2) the cost of funds rate, plus 1%, 13⁄4%and 11⁄2%, respectively, or (3) the bank’s base rate.  The average interest rates for the three andsix months ended June 30, 2008 were approximately 3.8% and 4.2%,respectively.  We incur a letter ofcredit fee of 1% per annum for each letter of credit issued.  In addition, we incur a commitment fee on theunused portion of the three facilities under the credit agreement (includingthe unused portion of either of the seasonal overline facilities exercised byus) at a rate of 25 basis points per annum, a facility fee of10 basis points per annum on any unexercised seasonal overline facilityduring the period between September 1 and June 30 and a seasonaloverline fee of $30,000 each time we elect to exercise either of theseasonal overline facilities.

 

Asof June 30, 2008, we had total borrowings outstanding under our creditagreement of $521.1 million, including $71.2 million outstanding onour acquisition facility, and outstanding letters of credit of$84.6 million.  The total remainingavailability for borrowings and letters of credit at June 30, 2008 was$144.3 million.

 

Thecredit agreement imposes covenants that require us to maintain certain minimumworking capital amounts, capital expenditure limits, a minimum EBITDA ratio, aminimum interest coverage ratio and a maximum leverage ratio.  In the event of default under any of thesecovenants, we may seek a waiver or amendment of the covenants.  Pursuant to the credit agreement, the minimumcombined interest coverage ratio for the quarter ended June 30, 2008 was2.50:1.00.  As of July 18, 2008, thecredit agreement was amended retroactively to June 30, 2008 with respectto the combined interest coverage ratio covenant and the minimum was reduced to1.75:1.00.  We were in compliance withthese covenants, as amended, at June 30, 2008.

 

Thecredit agreement provides that in each calendar year the outstanding amountunder the working capital revolving credit facility must be equal to or lessthan $263.0 million for a period of ten consecutive calendar days.  It is anticipated that the seasonal decreasein working capital as we exit our heating season will contribute to a decreasein borrowings outstanding under our credit agreement.

 

Thecredit agreement limits distributions to our unitholders to available cash andpermits borrowings to fund such distributions only under the $15.0 millionrevolving credit facility.  The revolvingcredit facility is subject to an annual “clean-down” period, requiring us toreduce the amount outstanding under the revolving credit facility to $0 for30 consecutive calendar days in each calendar year.

 

Ourobligations under the credit agreement are secured by substantially all of ourassets and the assets of our operating company and operating subsidiaries.

 

OnJuly 18, 2008, the credit agreement was amended to provide that, amongother things:

 

·      Theseasonal overline period for the existing two $50.0 million seasonal overlinefacilities, which ended on June 30, 2008, has been reinstated for theperiod from July 21, 2008 through August 31, 2008.  During thisseasonal overline extension period, up to $650.0 million, which includes theexisting two seasonal overline facilities, will be available to us under theworking capital revolving credit facility.

 

·      Borrowingsunder the working capital revolving credit facility will bear interest at (1) theEurodollar rate plus 175 to 225 basis points, (2) the cost of fundsrate plus 175 to 225 basis points, or (3) the base rate plus 75 to125 basis points, each depending on the pricing level provided in theamendment, which in turn depends upon the Combined Interest Coverage Ratio (assuch term is defined in the credit agreement).  Borrowings under theacquisition and revolving credit facilities will bear interest at (1) theEurodollar rate plus 225 to 275 basis points, (2) the cost of fundsrate plus 175 to 225 basis points, or (3) the base rate plus 75 to125 basis points, each depending on the pricing level provided in theamendment, which in turn depends upon the Combined Interest Coverage Ratio.

 

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·      A commitment fee will be incurred on theunused portion of the three facilities equal to 30.00 to 37.50 basis points,depending on the pricing level and the Combined Interest Coverage Ratio asprovided in the amendment.

 

·      The amendment increases the amount thatmay be requested by us under the Total WC Revolver Commitment (as such term isdefined in the credit agreement) by $100.0 million, to an aggregate totalof $200.0 million, so long as there is no Default or Event of Default (assuch terms are defined in the credit agreement) at the time of any such requestby us, and provided that any such request must be in a minimum amount of$5.0 million.

 

·      The Minimum EBITDA (as defined in thecredit agreement) as at the end of the June 30, 2008 fiscal quarter andeach fiscal quarter ending thereafter shall not be less than $30.0 million.

 

·      The Combined Interest Coverage Ratio (asdefined in the credit agreement) as of the end of any fiscal quarter shall notbe less than (i) 1.75:1.00 for the fiscal quarters ending June 30,2008, September 30, 2008 and December 31, 2008 and (ii) 2.00:1.00for the fiscal quarter ending March 31, 2009 and each fiscal quarterthereafter.

 

***Off-Balance Sheet Arrangements***

 

Wehave no off-balance sheet arrangements.

 

**CriticalAccounting Policies and Estimates**

** **

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with GAAP.  The preparation ofthese consolidated financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results may differ from these estimates under differentassumptions or conditions.

 

Theseestimates are based on our knowledge and understanding of current conditionsand actions that we may take in the future. Changes in these estimates will occur as a result of the passage of timeand the occurrence of future events.  Wehave identified the following estimates that, in our opinion, are subjective innature, require the exercise of judgment, and involve complex analysis:  inventory, leases, revenue recognition,derivative financial instruments and environmental and other liabilities.

 

Thesignificant accounting policies and estimates that we have adopted and followedin the preparation of our consolidated financial statements are detailed inNote 2 of Notes to Financial Statements, “Summary of SignificantAccounting Policies” included in our Annual Report on Form 10-K for theyear ended December 31, 2007.  Except as discussed in Notes 15 and 16 of Notes to Consolidated FinancialStatements related to the adoption of SFAS No. 157, there have beenno subsequent changes in these policies and estimates that had a significantimpact on our financial condition and results of operations for the periodscovered in this report.

 

**RecentAccounting Pronouncements**

 

Adescription and related impact expected from the adoption of certain newaccounting pronouncements is provided in Note 16 of Notes to ConsolidatedFinancial Statements.

 

**Item 3.****       ****Quantitative and QualitativeDisclosures about Market Risk**

 

Marketrisk is the risk of loss arising from adverse changes in market rates andprices.  The principal market risks towhich we are exposed are interest rate risk and commodity risk.  We utilize one interest rate collar to manageexposure to interest rate risk and various derivative instruments to manageexposure to commodity risk.

 

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***Interest Rate Risk***

 

Weutilize variable rate debt and are exposed to market risk due to the floatinginterest rates on our credit facility and term loan.  Therefore, from time to time, we utilizeinterest rate swaps and collars to hedge interest obligations on specific andanticipated debt issuances.

 

Duringthe period from January 1, 2008 through June 30, 2008, borrowingsunder our working capital revolving credit, acquisition credit and revolvingcredit facilities bore interest at our option at (1) the Eurodollar rate,plus 1%, 11⁄2% and 11⁄2 %, respectively, (2) the cost of funds rate, plus 1%,13⁄4% and 11⁄2 %, respectively, or (3) the bank’s base rate.  The average interest rates for the three andsix months ended June 30, 2008 were approximately 3.8% and 4.2%,respectively.  On July 18, 2008, thecredit agreement was amended whereby borrowings under the working capital revolving creditfacility will bear interest at (1) the Eurodollar rate plus 175 to225 basis points, (2) the cost of funds rate plus 175 to225 basis points, or (3) the base rate plus 75 to 125 basispoints, each depending on the pricing level provided in the amendment, which inturn depends upon the Combined Interest Coverage Ratio.  Borrowings underthe acquisition and revolving credit facilities will bear interest at (1) theEurodollar rate plus 225 to 275 basis points, (2) the cost of fundsrate plus 175 to 225 basis points, or (3) the base rate plus 75 to125 basis points, each depending on the pricing level provided in theamendment, which in turn depends upon the Combined Interest Coverage Ratio.

 

Asof June 30, 2008, we had total borrowings outstanding under the creditagreement of $521.1 million and outstanding letters of credit of$84.6 million.  The impact of a 1%increase in the interest rate on this amount of debt would have resulted in anincrease in interest expense, and a corresponding decrease in our results ofoperations, of approximately $5.2 million annually, assuming, however,that our indebtedness remained constant throughout the year.

 

We executed a zero premiuminterest rate collar with a major financial institution.  The collar, which became effective on May 14,2007, is used to hedge the variability in interest payments due to changes inthe three-month LIBOR rate with respect to $100.0 million of long-term three-month LIBOR-basedborrowings.  Under the contract, wecapped our exposure at a maximum three-month LIBOR rate of 5.75%.  In addition, we established a minimum floorthree-month LIBOR rate of 3.75%. Whenever the three-month LIBOR rate is greater than the cap, we receivefrom the financial institution the difference between the cap and the currentthree-month LIBOR rate on the $100.0 million of long-term three-month LIBOR-basedborrowings.  Conversely, whenever thethree-month LIBOR rate is lower than the floor, we remit to the financialinstitution the difference between the floor and the current three-month LIBORrate on the $100.0 millionof long-term three-month LIBOR-based borrowings.  As of June 30, 2008, thethree-month LIBOR rate of 2.68% was lower than the floor rate.  As a result, we will remit to the financialinstitution the difference between the floor rate and the current rate whichamounted to approximately $143,300.  The collar, which expires on May 14, 2011, isdesignated as a cash flow hedge and accounted for under the provisions of SFAS No. 133,as amended (see Note 5of Notes to Consolidated Financial Statements).

 

***Commodity Risk***

 

Wehedge our exposure to price fluctuations with respect to refined petroleumproducts in storage and expected purchases and sales of these commodities.  The derivative instruments utilized consistprimarily of futures contracts traded on the NYMEX and over-the-countertransactions, including swap agreements entered into with established financialinstitutions and other credit-approved energy companies.  Our policy is generally to purchase onlyproducts for which we have a market and to structure our sales contracts sothat price fluctuations do not materially affect our profit.  While our policies are designed to minimizemarket risk, some degree of exposure to unforeseen fluctuations in marketconditions remains.  Except for thecontrolled trading program discussed below, we do not acquire and hold futurescontracts or other derivative products for the purpose of speculating on pricechanges that might expose us to indeterminable losses.

 

Whilewe seek to maintain a position that is substantially balanced within ourproduct purchase activities, we may experience net unbalanced positions forshort periods of time as a result of variances in daily sales andtransportation and delivery schedules as well as logistical issues associatedwith inclement weather conditions.  Inconnection with managing these positions and maintaining a constant presence inthe marketplace, both necessary for our business, we engage in a controlledtrading program for up to an aggregate of 250,000 barrels of refined petroleumproducts.

 

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Weenter into futures contracts to minimize or hedge the impact of marketfluctuations on our purchase and forward fixed price sales of refined petroleumproducts.  Any hedge ineffectiveness isreflected in our results of operations. We utilize the NYMEX, which is a regulated exchange for energy productsthat it trades, thereby reducing potential delivery and supply risks.  Generally, our practice is to close all NYMEXpositions rather than to make or receive physical deliveries.  With respect to other energy products, weenter into derivative agreements with counterparties that we believe have astrong credit profile, in order to hedge market fluctuations and/or lock-inmargins relative to our commitments.

 

AtJune 30, 2008, the fair value of all of our commodity risk derivativeinstruments and the change in fair value that would be expected from a 10%price increase are shown in the table below (in thousands):

 

Gain (loss):

 
| ** **                    | ** ** | **Fair Value at  June 30, 2008** | ** ** | **Effect of 10%**** Price Increase** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                          |       |                                                 |       |                                                     |       |
| NYMEX contracts               |       | $                                                    | 25,971     |                                                     | $          | 9,359 |   |
| Swaps, options and other, net |       | (14,344                                              | )          | (18,739                                                  | )          |
|                          |       | $                                                    | 11,627     |                                                     | $          | (9,380 | ) |

 

Thefair values of the futures contracts are based on quoted market prices obtainedfrom the NYMEX.  The fair value of theswaps and option contracts are estimated based on quoted prices from varioussources such as independent reporting services, industry publications andbrokers.  These quotes are compared tothe contract price of the swap, which approximates the gain or loss that wouldhave been realized if the contracts had been closed out at June 30, 2008.  For positions where independent quotationsare not available, an estimate is provided, or the prevailing market price atwhich the positions could be liquidated is used.  All hedge positions offset physical exposuresto the spot market; none of these offsetting physical exposures are included inthe above table.  Price-risksensitivities were calculated by assuming an across-the-board 10% increase inprice regardless of term or historical relationships between the contractualprice of the instruments and the underlying commodity price.  In the event of an actual 10% change inprompt month prices, the fair value of our derivative portfolio would typicallychange less than that shown in the table due to lower volatility in out-monthprices.  We have a daily marginrequirement to maintain a cash deposit with our broker based on the prior day’smarket results on open futures contracts. The balance of this deposit will fluctuate based on our open marketpositions and the commodity exchange’s requirements.  The required brokerage margin balance was$15.5 million at June 30, 2008.

 

Weare exposed to credit loss in the event of nonperformance by counterparties offutures contracts, forward contracts and swap agreements, but do not anticipatenonperformance by any of these counterparties. Futures contracts, the primary derivative instrument utilized, aretraded on regulated exchanges, greatly reducing potential credit risks.  Exposure on swap and certain optionagreements is limited to the amount of the recorded fair value as of thebalance sheet dates.  We utilizeprimarily one clearing broker, a major financial institution, for all NYMEXderivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is displayed on a net basis.

 

**Item 4.****       ****Controls and Procedures**

 

In designing andevaluating controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

***DisclosureControls and Procedures***

 

Wemaintain disclosure controls and procedures that are designed to ensure thatthe information required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.  Under the supervision and withthe participation of our principal executive officer and principal financialofficer, management evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of theExchange Act).  Based on that evaluation,our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures were effective as of the fiscal quarterended June 30, 2008.

 

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***Internal Control over Financial Reporting***

 

There has not been any change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) of theExchange Act) that occurred during the fiscal quarter ended June 30, 2008that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.****       ****Legal Proceedings**

 

Althoughwe may, from time to time, be involved in litigation and claims arising out ofour operations in the normal course of business, we do not believe that we area party to any litigation that will have a material adverse impact on ourfinancial condition or results of operations. Except as described in our Annual Report on Form 10-K for the yearended December 31, 2007, we are not aware of any significant legal orgovernmental proceedings against us, or contemplated to be brought againstus.  We maintain insurance policies withinsurers in amounts and with coverage and deductibles as our general partnerbelieves are reasonable and prudent. However, we can provide no assurance that this insurance will beadequate to protect us from all material expenses related to potential futureclaims for personal and property damage or that these levels of insurance willbe available in the future at economical prices.

 

**Item 1A.****    ****Risk Factors**

 

Pleaserefer to our Annual Report on Form 10-K for the year ended December 31,2007 for additional risk factors.

 

***Our results of operations are influenced by theoverall forward market for refined petroleum products, and pricing volatilitymay adversely impact our results.***

*** ***

Resultsfrom our marketing and terminalling operations are influenced by the productprices, the market for refined petroleum products and pricing volatility.  When prices for refined petroleum productsare high, some of our customers may have insufficient credit to purchase supplyfrom us at their historical purchase volumes and their customers may adoptconservation measures which reduce consumption, thereby reducing demand forproduct.  Furthermore, when pricesincrease rapidly and dramatically, we may be unable to promptly pass ouradditional costs to our customers, resulting in lower margins for us whichcould adversely affect our results of operations.

 

***We are exposed to trade credit risk in theordinary course of our business activities.***

*** ***

Weare exposed to risks of loss in the event of nonperformance by our customersand by counterparties of our forward contracts, options and swapagreements.  Some of our customers andcounterparties may be highly leveraged and subject to their own operating andregulatory risks.  Even if our creditreview and analysis mechanisms work properly, we may experience financiallosses in our dealings with other parties. Any increase in the nonpayment or nonperformance by our customers and/orcounterparties could reduce our ability to make distributions to ourunitholders.  Additionally, in anenvironment of significantly higher refined petroleum product prices, access totrade credit support could become diminished or more expensive.

 

**Item 6.****       ****Exhibits**

 
| 3.1    |   | — |   | Second Amended and  Restated Agreement of Limited Partnership of Global Partners LP dated as of  May 9, 2007 (incorporated herein by reference to Exhibit 3.1 to the  Current Report on Form 8-K filed on May 10, 2007).                                                                                                                                                                                                                                                                            |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2    |   | — |   | Amendment No. 1 to  the Second Amended and Restated Agreement of Limited Partnership of Global  Partners LP dated April 14, 2008 (incorporated herein by reference to  Exhibit 3.1 to the Current Report on Form 8-K filed on  April 17, 2008).                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1   |   | — |   | Waiver Letter and Seventh  Amendment to Credit Agreement, dated as of March 13, 2008, among Global  Operating LLC, Global Companies LLC, Global Montello Group Corp., Glen  Hes Corp. and Chelsea Sandwich LLC, as borrowers, Global Partners LP and  Global GP LLC, as guarantors, each lender from time to time party thereto,  and Bank of America, N.A., as Administrative Agent and L/C Issuer.                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2   |   | — |   | Eighth Amendment to Credit  Agreement, dated as of June 13, 2008, among Global Operating LLC,  Global Companies LLC, Global Montello Group Corp., Glen Hes Corp. and Chelsea  Sandwich LLC, as borrowers, Global Partners LP and Global GP LLC, as  guarantors, each lender from time to time party thereto, and Bank of America,  N.A., as Administrative Agent and L/C Issuer (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K filed  on June 17, 2008). |

 

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| 31.1       |   | — |   | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer of  Global GP LLC, general partner of Global Partners LP. |
|------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |   |   |                                                                                                                                      |
| 31.2       |   | — |   | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of  Global GP LLC, general partner of Global Partners LP. |
|       |   |   |   |                                                                                                                                      |
| 32.1† |   | — |   | Section 1350  Certification of Chief Executive Officer of Global GP LLC, general partner of Global Partners  LP.                     |
|       |   |   |   |                                                                                                                                      |
| 32.2† |   | — |   | Section 1350  Certification of Chief Financial Officer of Global GP LLC, general partner of Global Partners  LP.                     |

 

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**†****      **Not deemed “filed” for purposes of Section 18of the Securities Exchange Act of 1934 or otherwise subject to the liability ofthat section.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| ** **                 |   | **GLOBAL PARTNERS LP** |
|----------------------------|--------|------------------------|
|                       |   | By:                    | Global GP LLC, |   |
|                       |   |                   | its general partner |   |
|                       |   |                   |   |
|                       |   |                   |   |   |
| Dated: August 8, 2008 |   |                   | By: | /s/ Eric Slifka |
|                       |   |                   |   | Eric Slifka |
|                       |   |                   |   | President and Chief Executive Officer |
|                       |   |                   |   | (Principal Executive Officer) |
|                       |   |                   |   |   |
|                       |   |                   |   |   |
| Dated: August 8, 2008 |   |                   | By: | /s/ Thomas J. Hollister |
|                       |   |                   |   | Thomas J. Hollister |
|                       |   |                   |   | Chief Operating Officer and Chief Financial  Officer |
|                       |   |                   |   | (Principal Financial Officer) |
|                            |        |                        |  |  |  |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1                 |       | —     |       | Second Amended and  Restated Agreement of Limited Partnership of Global Partners LP dated as of  May 9, 2007 (incorporated herein by reference to Exhibit 3.1 to the  Current Report on Form 8-K filed on May 10, 2007).                                                                                                                                                                                                                                                                            |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2                 |       | —     |       | Amendment No. 1 to  the Second Amended and Restated Agreement of Limited Partnership of Global  Partners LP dated April 14, 2008 (incorporated herein by reference to  Exhibit 3.1 to the Current Report on Form 8-K filed on  April 17, 2008).                                                                                                                                                                                                                                                |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1                |       | —     |       | Waiver Letter and Seventh  Amendment to Credit Agreement, dated as of March 13, 2008, among Global  Operating LLC, Global Companies LLC, Global Montello Group Corp., Glen  Hes Corp. and Chelsea Sandwich LLC, as borrowers, Global Partners LP and Global  GP LLC, as guarantors, each lender from time to time party thereto, and Bank  of America, N.A., as Administrative Agent and L/C Issuer.                                                                                                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2                |       | —     |       | Eighth Amendment to Credit  Agreement, dated as of June 13, 2008, among Global Operating LLC,  Global Companies LLC, Global Montello Group Corp., Glen Hes Corp. and Chelsea  Sandwich LLC, as borrowers, Global Partners LP and Global GP LLC, as  guarantors, each lender from time to time party thereto, and Bank of America,  N.A., as Administrative Agent and L/C Issuer (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K filed  on June 17, 2008). |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.1                |       | —     |       | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer of  Global GP LLC, general partner of Global Partners LP.                                                                                                                                                                                                                                                                                                                                                                               |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.2                |       | —     |       | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of  Global GP LLC, general partner of Global Partners LP.                                                                                                                                                                                                                                                                                                                                                                               |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.1†          |       | —     |       | Section 1350  Certification of Chief Executive Officer of Global GP LLC, general partner of Global Partners  LP.                                                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.2†          |       | —     |       | Section 1350  Certification of Chief Financial Officer of Global GP LLC, general partner of Global Partners  LP.                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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**†****      **Not deemed “filed” for purposes of Section 18of the Securities Exchange Act of 1934 or otherwise subject to the liability ofthat section.

 

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