**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

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**FORM 10-Q**

**(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, 2006**                                                                                                                                                              | ** ** |
| ** ** | ** **                                                                                                                                                                                                    | ** ** |
| ** ** | **OR**                                                                                                                                                                                                        | ** ** |
| ** ** | ** **                                                                                                                                                                                                    | ** ** |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                 | ** ** |
| ** ** | ** **                                                                                                                                                                                                    | ** ** |
| ** ** | **For the transition period  from              to              ** | ** ** |

 

**Commissionfile number 001-32593**

**Global Partners LP**

(Exact name 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 telephonenumber, including area code)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(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.                    Yesý No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act.(Check one):

Large acceleratedfiler  o                Acceleratedfiler  o                Non-acceleratedfiler  x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).    Yes oNo ý

The issuer had 5,642,424 common units and 5,642,424subordinated units outstanding as of August 7, 2006.

 

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**TABLE OF CONTENTS**

 
| **PART I.**                     | ** **                                                                                                | **FINANCIAL INFORMATION**                                                                       |
|---------------------------------|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                            |                                                                                                      |                                                                                            |
| **Item 1.**                     | ** **                                                                                                | **Financial  Statements**                                                                       |
|                            |                                                                                                      |                                                                                            |
|                            | Consolidated Balance Sheets as of June 30, 2006 and  December 31, 2005                                    |
|                            |                                                                                                      |
|                            | Consolidated/Combined Statements of Operations for the  three and six months ended June 30, 2006 and 2005 |
|                            |                                                                                                      |
|                            | Consolidated/Combined Statements of Cash Flows for the  six months ended June 30, 2006 and 2005           |
|                            |                                                                                                      |
|                            | Consolidated Statements of Partners’ Equity for the  six months ended June 30, 2006                  |
|                            |                                                                                                      |
|                            | Notes to 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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**Item 1.    FinancialStatements**

**GLOBALPARTNERS LP**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except unit data)(Unaudited)**
| ** **                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,**            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**          | ** ** | **  2005  ** | ** ** |
| **Assets**                                                                                                                          |       |              |       |                             |       |
| Current assets:                                                                                                                     |       |              |       |                             |       |
| Cash and cash  equivalents                                                                                                          |       | $                 | 940        |                             | $          | 1,769 |   |
| Accounts receivable,  net                                                                                                           |       | 168,800           |       | 237,861                          |       |
| Accounts  receivable – affiliates                                                                                              |       | 1,783             |       | 2,005                            |       |
| Inventories                                                                                                                         |       | 263,937           |       | 260,714                          |       |
| Brokerage margin  deposits                                                                                                          |       | 5,517             |       | 9,210                            |       |
| Prepaid expenses  and other current assets                                                                                          |       | 12,676            |       | 7,781                            |       |
| Total current  assets                                                                                                               |       | 453,653           |       | 519,340                          |       |
|                                                                                                                                |       |              |       |                             |       |
| Property and equipment,  net                                                                                                        |       | 26,145            |       | 21,975                           |       |
| Intangible assets, net                                                                                                              |       | 9,791             |       | 10,603                           |       |
| Other assets                                                                                                                        |       | 2,585             |       | 2,838                            |       |
|                                                                                                                                |       |              |       |                             |       |
| Total assets                                                                                                                        |       | $                 | 492,174    |                             | $          | 554,756 |   |
|                                                                                                                                |       |              |       |                             |       |
| **Liabilities and partners’  equity**                                                                                          |       |              |       |                             |       |
| Current liabilities:                                                                                                                |       |              |       |                             |       |
| Accounts payable                                                                                                                    |       | $                 | 184,168    |                             | $          | 259,463 |   |
| Notes payable,  other – current portion                                                                                        |       | 297               |       | 297                              |       |
| Income taxes  payable                                                                                                               |       | 739               |       | 1,200                            |       |
| Accrued expenses  and other current liabilities                                                                                     |       | 24,454            |       | 28,615                           |       |
| Obligations on  forward fixed price contracts and other derivatives                                                                 |       | 9,863             |       | 1,038                            |       |
| Total current  liabilities                                                                                                          |       | 219,521           |       | 290,613                          |       |
|                                                                                                                                |       |              |       |                             |       |
| Long-term liabilities:                                                                                                              |       |              |       |                             |       |
| Revolving line  of credit                                                                                                           |       | 183,800           |       | 181,600                          |       |
| Notes payable,  other – less current portion                                                                                   |       | 1,412             |       | 1,559                            |       |
| Other long-term  liabilities                                                                                                        |       | 4,592             |       | 4,676                            |       |
| Total long-term  liabilities                                                                                                        |       | 189,804           |       | 187,835                          |       |
|                                                                                                                                |       |              |       |                             |       |
| Partners’ equity                                                                                                               |       |              |       |                             |       |
| Common  unitholders (5,642,424 units issued and outstanding at June 30, 2006 and  December 31, 2005)                           |       | 100,717           |       | 97,512                           |       |
| Subordinated  unitholders (5,642,424 units issued and outstanding at June 30, 2006 and  December 31, 2005)                          |       | (17,167           | )          | (20,372                          | )          |
| General partner  interest (2% interest with 230,303 equivalent units outstanding at June 30, 2006  and December 31, 2005) |       | (701              | )          | (832                             | )          |
| Total partners’  equity                                                                                                        |       | 82,849            |       | 76,308                           |       |
|                                                                                                                                |       |              |       |                             |       |
| Total liabilities and partners’ equity                                                                                         |       | $                 | 492,174    |                             | $          | 554,756 |   |

 

The accompanying notesare an integral part of these financial statements.

1

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**GLOBAL PARTNERS LP**

**CONSOLIDATED/COMBINEDSTATEMENTS OF OPERATIONS**

**(In thousands,except per unit data)(Unaudited)**
| ** **                                                                    | ** ** | **Successor**                                   | ** ** | **Predecessor**                               | ** ** | **Successor**    | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| ** **                                                                    | ** ** | **Consolidated**                                | ** ** | **Combined**                                  | ** ** | **Consolidated** | ** ** | **Combined**    | ** ** |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Sales                                                                         |       | $                                               | 1,031,353  |                                          | $          | 763,197          |       | $               | 2,382,376  |   | $ | 1,915,276 |   |
| Cost of sales                                                                 |       | 1,010,709                                       |       | 748,706                                       |       | 2,329,515        |       | 1,872,397       |       |
| Gross profit                                                                  |       | 20,644                                          |       | 14,491                                        |       | 52,861           |       | 42,879          |       |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Selling, general and  administrative expenses                                 |       | 9,416                                           |       | 8,193                                         |       | 19,988           |       | 17,783          |       |
| Operating expenses                                                            |       | 5,266                                           |       | 4,844                                         |       | 10,817           |       | 9,910           |       |
| Amortization expenses                                                         |       | 406                                             |       | 405                                           |       | 812              |       | 811             |       |
| Operating income                                                              |       | 5,556                                           |       | 1,049                                         |       | 21,244           |       | 14,375          |       |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Interest expense                                                              |       | 1,786                                           |       | 1,952                                         |       | 4,106            |       | 3,978           |       |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Income (loss) before  income tax expense                                      |       | 3,770                                           |       | (903                                          | )          | 17,138           |       | 10,397          |       |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Income tax expense                                                            |       | 290                                             |       | —                                        |       | 970              |       | —          |       |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Net income (loss)                                                             |       | 3,480                                           |       | $                                             | (903       | )                | 16,168     |            | $          | 10,397 |   |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Less:                                                                         |       |                                            |       |                                          |       |             |       |            |       |
| General partner’s  interest in net income                                |       | 70                                              |       |                                          |       | 324              |       |            |       |
| Limited partners’  interest in net income                                |       | $                                               | 3,410      |                                          |       |             | $          | 15,844          |       |   |   |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Net income per limited  partner unit, basic and diluted(1)                    |       | $                                               | 0.30       |                                          |       |             | $          | 1.15            |       |   |   |
|                                                                          |       |                                            |       |                                          |       |             |       |            |       |
| Weighted average  limited partners’ units outstanding, basic and diluted |       | 11,285                                          |       |                                          |       | 11,285           |       |            |       |

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(1)             SeeNote 3 for net income per limited partner unit calculation.

*The accompanying notes are anintegral part of these financial statements.*

2

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**GLOBAL PARTNERS LP**

**CONSOLIDATED/COMBINEDSTATEMENTS OF CASH FLOWS**

**(In thousands)(Unaudited)**
| ** **                                                                         | ** ** | **Successor**                                 | ** ** | **Predecessor** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2005**        | ** ** |
| ** **                                                                         | ** ** | **Consolidated**                              | ** ** | **Combined**    | ** ** |
|                                                                               |       |                                          |       |            |       |
| **Operating activities**                                                           |       |                                          |       |            |       |
| Net income                                                                         |       | $                                             | 16,168     |            | $          | 10,397 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |            |       |
| Depreciation and  amortization                                                     |       | 1,960                                         |       | 1,929           |       |
| Amortization of  deferred financing fees                                           |       | 200                                           |       | 298             |       |
| Disposition of  property and equipment                                             |       | 175                                           |       | 2               |       |
| Changes in  operating assets and liabilities:                                      |       |                                          |       |            |       |
| Accounts  receivable                                                               |       | 69,061                                        |       | 40,169          |       |
| Accounts  receivable — affiliate                                              |       | 222                                           |       | 549             |       |
| Inventories                                                                        |       | (3,223                                        | )          | (31,600         | )          |
| Prepaid  expenses, all other current assets and other assets                       |       | (1,148                                        | )          | 2,227           |       |
| Accounts payable                                                                   |       | (75,295                                       | )          | 4,391           |       |
| Accrued expenses  and all other current liabilities                                |       | 4,119                                         |       | 13,057          |       |
| Other long-term  liabilities                                                       |       | —                                        |       | (458            | )          |
| Net cash provided by  operating activities                                         |       | 12,239                                        |       | 40,961          |       |
|                                                                               |       |                                          |       |            |       |
| **Investing activities**                                                           |       |                                          |       |            |       |
| Terminal acquisition                                                               |       | (2,348                                        | )          | —          |       |
| Maintenance capital  expenditures                                                  |       | (515                                          | )          | (626            | )          |
| Capital improvement  expenditures                                                  |       | (2,650                                        | )          | —          |       |
| Proceeds from sale of  property and equipment                                      |       | 19                                            |       | 5               |       |
| Net cash used in  investing activities                                             |       | (5,494                                        | )          | (621            | )          |
|                                                                               |       |                                          |       |            |       |
| **Financing activities**                                                           |       |                                          |       |            |       |
| Proceeds from (payments  on) revolving line of credit, net                         |       | 2,200                                         |       | (35,000         | )          |
| Payments on note  payable, other                                                   |       | (147                                          | )          | (136            | )          |
| Distributions to  partners                                                         |       | (9,627                                        | )          | (7,495          | )          |
| Net cash used in  financing activities                                             |       | (7,574                                        | )          | (42,631         | )          |
|                                                                               |       |                                          |       |            |       |
| Decrease in cash and  cash equivalents                                             |       | (829                                          | )          | (2,291          | )          |
| Cash and cash  equivalents at beginning of period                                  |       | 1,769                                         |       | 3,306           |       |
| Cash and cash  equivalents at end of period                                        |       | $                                             | 940        |            | $          | 1,015 |   |
|                                                                               |       |                                          |       |            |       |
| **Supplemental information**                                                       |       |                                          |       |            |       |
| Cash paid during the period for interest                                           |       | $                                             | 4,070      |            | $          | 4,516 |   |

*The accompanying notes are an integral part ofthese financial statements.*

3

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTSOF PARTNERS’ EQUITY**

**(In thousands)(Unaudited)**
| ** **                    | ** ** | ** **      | ** ** | ** **       | ** ** | **General**  | ** ** | **Total**          | ** ** |
|-------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|--------------------|------------|
| ** **                    | ** ** | **Common**      | ** ** | **Subordinated** | ** ** | **Partner**  | ** ** | **Partners’** | ** ** |
| ** **                    | ** ** | **Unitholders** | ** ** | **Unitholders**  | ** ** | **Interest** | ** ** | **Equity**         | ** ** |
| Balance at December 31,  2005 |       | $               | 97,512     |             | $          | (20,372      | )          | $                  | (832       | ) | $ | 76,308 |   |
|                          |       |            |       |             |       |         |       |               |       |
| Distribution to  partners     |       | (4,717          | )          | (4,717           | )          | (193         | )          | (9,627             | )          |
|                          |       |            |       |             |       |         |       |               |       |
| Net income                    |       | 7,922           |       | 7,922            |       | 324          |       | 16,168             |       |
|                          |       |            |       |             |       |         |       |               |       |
| Balance at June 30, 2006      |       | $               | 100,717    |             | $          | (17,167      | )          | $                  | (701       | ) | $ | 82,849 |   |

 

*The accompanying notes are anintegral part of these financial statements.*

4

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**GLOBAL PARTNERS LP**

**NOTES TO FINANCIALSTATEMENTS**

**(Unaudited)**

**Note 1.**                      Organization and Basis ofPresentation

**Organization**

Global Partners LP(the “Partnership”) is a publicly held master limited partnership that engagesin the wholesale and commercial distribution of refined petroleum products,natural gas and ancillary services to companies domestically and, on a limitedbasis, internationally.  The Partnershipcommenced operations on October 4, 2005 upon the completion of its initialpublic offering of common units (the “IPO”). (See the Partnership’s Annual Report on Form 10-K for the year endedDecember 31, 2005 for more information regarding the IPO.)

The Partnershiphas four operating subsidiaries:  GlobalCompanies LLC, its subsidiary, Glen Hes Corp., Global Montello Group Corp. andChelsea Sandwich LLC (the four operating subsidiaries, collectively, the “Companies”).  The Companies are wholly owned by GlobalOperating LLC, a wholly owned subsidiary of the Partnership.

The Partnership’s2% general partner interest is held by Global GP LLC (the “General Partner”).  The General Partner, which is owned byaffiliates of the Slifka family, manages the Partnership’s operations andactivities and employs its officers and substantially all of itspersonnel.  Affiliates of the GeneralPartner, including its directors and executive officers, own 87,724 commonunits and 5,642,424 subordinated units, representing a combined 49.8% limitedpartner interest.

References to “GlobalPartners LP” or “the Partnership” or “the General Partner” as it relates to thecombined financial statements and these accompanying notes with respect to thethree and six months ended June 30, 2005 refer to the business of GlobalCompanies LLC and its affiliates, Glen Hes Corp., Global Montello Group LLC andChelsea Sandwich LLC (collectively, the “Predecessor”).

Immediately afterbecoming a master limited partnership, the Partnership converted GlobalMontello Group LLC (the predecessor to Global Montello Group Corp.) into ataxable corporation.  References to “theCompanies” in the Partnership’s combined financial statements and theseaccompanying notes include Global Montello Group LLC with respect to the threeand six months ended June 30, 2005 and, in the consolidated financialstatements and notes, Global Montello Group Corp. with respect to the three andsix months ended June 30, 2006.

**Basis of Presentation**

***Interim Financial Statements***

**Theaccompanying consolidated financial statements as of June 30, 2006 and December31, 2005 and for the three and six months ended June 30, 2006 reflect theaccounts of the Partnership.  Theaccompanying combined financial statements for the three and six months endedJune 30, 2005 reflect the accounts of the Predecessor.  All intercompany balances and transactionshave been eliminated.**

The accompanyingunaudited consolidated/combined financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”)and reflect all adjustments (consisting only of normal recurring adjustments)which are, in the opinion of management, necessary for a fair presentation ofthe financial condition and operating results for the interim periods.  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/combined financial statements for the year ended December 31, 2005and notes thereto contained in the Partnership’s Annual Report on Form10-K.  The results of operations for thethree and six months ended June 30, 2006 are not necessarily indicative of theresults of operations that will be realized for the entire year ending December31, 2006.

5

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As demand for some of the Partnership’s refinedpetroleum products, especially home heating oil and residual oil for spaceheating purposes, is generally greater during the winter months, sales areexpected be higher during the first and fourth quarters of the calendar yearwhich may result in significant fluctuations in the Partnership’s quarterlyoperating results.

The balance sheet at December 31, 2005 has beenderived from the audited financial statements and footnotes thereto included inthe Partnership’s Annual Report on Form 10-K for the year ended December 31,2005.

**Note 2.**                      Reclassification

Certain prior year amounts in theconsolidated/combined financial statements and accompanying notes have beenreclassified to conform to the current year presentation.

**Note 3.**                      Net Income Per Limited PartnerUnit

The computation of netincome per limited partner unit is based on the weighted average number ofcommon and subordinated units outstanding during the year.  Basic and diluted net income per limitedpartner unit are determined by dividing net income after deducting the amountallocated to the general partner interest (including its incentive distributionin excess of its 2% interest) by the weighted average number of outstandinglimited partner units during the period in accordance with Emerging Issues TaskForce (“EITF”) 03-06, “Participating Securities and the Two-Class Methodunder FASB Statement No. 128” (“EITF 03-06”). EITF 03-06 addresses the computation of earnings per share (in thePartnership’s case, net income per limited partner unit) by an entity that hasissued securities other than common stock that contractually entitle the holderto participate in dividends and earnings of the entity when, and if, itdeclares dividends on its common stock (in the Partnership’s case,distributions on its units). Essentially, EITF 03-06 provides that in any accounting periodwhere the Partnership’s aggregate net income exceeds its aggregate distributionfor such period, the Partnership is required to present net income per limitedpartner unit as if all of the earnings for the periods were distributed,regardless of whether those earnings would actually be distributed during aparticular period from an economic or practical perspective.  EITF 03-06 does not impact thePartnership’s overall net income or other financial results; however, forperiods in which the Partnership’s aggregate net income exceeds its aggregatedistributions for such period, it will have the impact of reducing the earningsper limited partner unit.  This resultoccurs as a larger portion of the Partnership’s aggregate earnings is allocatedto the incentive distribution rights held by the General Partner, as ifdistributed, even though the Partnership makes cash distributions on the basisof cash available for distributions, not earnings, in any given accountingperiod.  In accounting periods whereaggregate net income does not exceed aggregate distributions for such period,EITF 03-06 does not have any impact on the Partnership’s net income perlimited partner unit calculation.

6

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The following setsforth the net income allocation using this method for the three and six monthsended June 30, 2006 (in thousands, except per unit data):

|                                                            | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                       |       |                                                  |       |                                                |       |
| Net income                                                 |       | $                                                     | 3,480      |                                                | $          | 16,168 |   |
| Less:                                                      |       |                                                  |       |                                                |       |
| General Partner’s 2% ownership                        |       | (70                                                   | )          | (324                                                | )          |
| Net income available to limited partners                   |       | 3,410                                                 |       | 15,844                                              |       |
| Dilutive impact of theoretical distribution of  earnings   |       | —                                                |       | (2,872                                              | )          |
| Net income available to limited partners under EITF  03-06 |       | $                                                     | 3,410      |                                                | $          | 12,972 |   |
|                                                       |       |                                                  |       |                                                |       |
| Per unit data:                                             |       |                                                  |       |                                                |       |
| Net income available to limited partners                   |       | $                                                     | 0.30       |                                                | $          | 1.40 |   |
| Dilutive impact of theoretical distribution of  earnings   |       | —                                                |       | (0.25                                               | )          |
| Net income available to limited partners under EITF  03-06 |       | $                                                     | 0.30       |                                                | $          | 1.15 |   |
|                                                       |       |                                                  |       |                                                |       |
| Weighted average  limited partners’ units outstanding |       | 11,285                                                |       | 11,285                                              |       |

 

The Partnershipdid not and was not required to declare cash distributions during the three andsix months ended June 30, 2006 which would result in an incentive distributionto the General Partner.

**Note 4.**                      Inventories

Inventories, whichare valued at the lower of cost or market based on the first-in, first-outmethod, consisted of the following (in thousands):

|                                              | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                         |       |                    |       |                        |       |
| Distillates:  light oil, diesel and kerosene |       | $                       | 182,555    |                        | $          | 195,171 |   |
| Gasoline                                     |       | 36,778                  |       | 19,311                      |       |
| Blend stock                                  |       | 10,674                  |       | 6,782                       |       |
| Residual oil                                 |       | 33,930                  |       | 39,450                      |       |
| Total                                        |       | $                       | 263,937    |                        | $          | 260,714 |   |

 

The Partnership hedgessubstantially all of its inventory purchases through futures, options and swapagreements.   In addition to its owninventory, the Partnership has exchange agreements with unrelated third-partysuppliers, whereby it may draw inventory from these other suppliers.  Positive exchange balances are accounted foras accounts receivable.  Negativeexchange balances are accounted for as accounts payable.  Exchange transactions are valued usingcurrent quoted market prices.  The impactof exchange agreements was not material to the Partnership’s financialstatements at June 30, 2006 and December 31, 2005.

7

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**Note 5.**                      Derivative Financial Instruments

The Partnership recognizes all changes in the fairvalue of derivatives currently in earnings. The fair value of 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 in earningsas either an increase or decrease in cost of sales.  Ineffectiveness related to these hedgingactivities was immaterial at June 30, 2006.

The Partnership also uses futures contracts and swapsto hedge exposure under forward purchase and sale commitments.  These agreements are intended to hedge thecost component of virtually all of the Partnership’s forward commitments.  Changes in the fair value of these contractsare recognized currently in earnings as an increase or decrease in cost ofsales.

The Partnership also markets and sells naturalgas.  The Partnership conducts businessby entering into forward purchase commitments for natural gas only when itsimultaneously enters into arrangements for the sale of product for physicaldelivery to third-party users.  Throughthese transactions, which establish an immediate margin, the Partnership seeksto maintain a position that is substantially balanced between firm forwardpurchase and sales commitments.  Naturalgas is generally 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 compositionand (obligations on) fair value of derivative instruments consisted of thefollowing (in thousands):

|                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                           |       |                    |       |                        |       |
| Forward  contracts             |       | $                       | (8,938     | )                           | $          | 4,587 |   |
| Swaps, options  and other, net |       | (925                    | )          | (5,625                      | )          |
|                           |       | $                       | (9,863     | )                           | $          | (1,038 | ) |

 

The Partnershipformally documents all relationships between hedging instruments and hedgeditems, after its risk management objectives and strategy for undertaking thehedge are determined.  The Partnershipcalculates hedge effectiveness on a quarterly basis.  This process includes specific identificationof the hedging instrument and the hedged transaction, the nature of the riskbeing 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 Partnershiphas a daily margin requirement with its broker, based on the prior day’s marketresults on open futures contracts.  Therequired brokerage margin balance was $5.5 million and $9.2 million at June 30,2006 and December 31, 2005, respectively.

The Partnership isexposed to credit loss in the event of nonperformance by counterparties offorward contracts, options and swap agreements, but the Partnership has nocurrent reason to expect any material nonperformance by any of thesecounterparties.  Futures contracts, theprimary derivative instrument utilized by the Partnership, are traded onregulated 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.  The Partnershiputilizes primarily one broker for all derivative transactions and the right ofoffset exists.  Accordingly, the fairvalue of all derivative instruments is displayed on a net basis on the balancesheets.

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**Note 6.**                      Debt

In connection withthe closing of its IPO, the Partnership entered into a four-year senior securedcredit agreement (the “Credit Agreement”) in an aggregate principal amount ofup to $400.0 million as further described below.  In November 2005, the Credit Agreement wasamended to increase total available commitments from $400.0 million to $500.0million.  The working capital revolving creditfacility was increased by $100.0 million, comprised of a $50.0 million increasein the permanent working capital revolving credit facility commitment and a newseasonal overline facility of $50.0 million (which is available each year onlyduring the period between September 1st and June 30th).

The creditfacilities are available to fund working capital, make acquisitions and providepayment for general partnership purposes. There are three facilities under the Credit Agreement:

·              a working capitalrevolving credit facility to be used for working capital purposes and lettersof credit in the principal amount equal to the lesser of the Partnership’sborrowing base and $450.0 million, of which two $50.0 million seasonal overlinefacilities are available each year only during the period between September 1st and June 30th;

·              a $35.0 millionacquisition facility to be used for funding acquisitions similar to thePartnership’s business line that have a purchase price of $25.0 million or lessor $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 the Partnership’s unitholders.

Borrowings underthe Partnership’s working capital revolving credit, acquisition credit andrevolving credit facilities currently bear interest at the Partnership’s optionat (1) the Eurodollar rate, plus 1%, 13⁄4% and 11⁄2%, respectively, (2) the cost offunds rate, plus 1%, 13⁄4% and 11⁄2%, respectively, or (3) the bank’s baserate.  The Partnership incurs a letter ofcredit fee of 1% per annum for each letter of credit issued.  In addition, the Partnership incurs acommitment fee on the unused portion of the three facilities under the CreditAgreement (including the unused portion of either of the seasonal overlinefacilities exercised by the Partnership) at a rate of 25 basis points perannum, a facility fee of 10 basis points per annum on any unexercised seasonaloverline facility during the period between September 1st and June 30th and a seasonal overline fee of $30,000 eachtime the Partnership elects to exercise either of the seasonal overlinefacilities.

The CreditAgreement will mature in October 2009. Accordingly, the Credit Agreement has been classified as long-term inthe accompanying balance sheets.  At June30, 2006, availability under the Credit Agreement was reduced by theoutstanding balance under the working capital revolving credit facility ofapproximately $183.8 million and by letters of credit totaling approximately$42.0 million.  The total remainingavailability for borrowings and letters of credit at June 30, 2006 was $174.2million, which excludes the two $50.0 million seasonal overline facilities thePartnership did not exercise as of June 30, 2006.  The average interest rates for the three andsix months ended June 30, 2006 were 6.0% and 5.8%, respectively.

The Credit Agreement issecured by substantially all of the assets of the Partnership and each of theCompanies and is guaranteed by the General Partner.  The Credit Agreement imposes certainrequirements including, for example, a prohibition against distributions if anypotential default or event of default as defined in the Credit Agreement, asamended, would occur, and limitations on the Partnership’s ability to grantliens, make certain loans or investments, incur additional indebtedness orguarantee 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 CreditAgreement also imposes covenants that require the Partnership to maintaincertain minimum working capital amounts, a minimum EBITDA ratio, a minimuminterest coverage ratio and a maximum leverage ratio.  The Partnership was in compliance with thesecovenants at June 30, 2006.

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The CreditAgreement limits distributions by the Partnership to its unitholders to theamount of the Partnership’s available cash and permits borrowings to fund suchdistributions only under the revolving credit facility.  The revolving credit facility is subject toan annual “clean-down” period, requiring the Partnership to reduce the amountoutstanding under the revolving credit facility to $0 for 30 consecutivecalendar days in each calendar year.

In August 2006,the Partnership entered into a Second Amendment to the Credit Agreement to increasethe permanent working capital revolving credit facility commitment by $100.0million for total available commitments of $600.0 million (see Note 13).

**Note 7.**                      Employee Benefit Plan withRelated Party

The Partnership’s net periodic benefit cost for itsdefined benefit pension plan consisted of the following components (inthousands):

|                                 | ** ** | **Successor**                                   | ** ** | **Predecessor**                               | ** ** | **Successor**    | ** ** | **Predecessor** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| ** **                      | ** ** | **Consolidated**                                | ** ** | **Combined**                                  | ** ** | **Consolidated** | ** ** | **Combined**    | ** ** |
| ** **                      |       |                                            |       |                                          |       |             |       |            |       |
| Service cost                    |       | $                                               | 191        |                                          | $          | 170              |       | $               | 382        |   | $ | 340 |   |
| Interest cost                   |       | 149                                             |       | 132                                           |       | 299              |       | 263             |       |
| Expected return  on plan assets |       | (144                                            | )          | (137                                          | )          | (289             | )          | (272            | )          |
| Net periodic benefit  cost      |       | $                                               | 196        |                                          | $          | 165              |       | $               | 392        |   | $ | 331 |   |

 

**Note 8.**                      Related Party Transactions

In connection withthe Partnership’s IPO, the Partnership entered into a Second Amended andRestated Terminal Storage Rental and Throughput Agreement which, among otherthings, extended the term of the then current non-cancelable terminal facilityagreement with Global Petroleum Corp. (“GPC”) through December 2013.  The agreement is accounted for as anoperating lease.  The expense under thisagreement (or the applicable predecessor agreement with GPC, as the case maybe) was $2.0 million for each of the three months ended June, 2006 and 2005 and$4.1 million and $3.9 million for the six months ended June 30, 2006 and 2005,respectively.

GPC providescertain terminal operating management services to the Partnership and uses certainadministrative, accounting and information processing services of thePartnership.  The expense from theseservices was approximately $22,000 and $17,000 for the three months ended June30, 2006 and 2005, respectively, and $39,000 and $34,000 for the six monthsended June 30, 2006 and 2005, respectively. These affiliate charges have been recorded in selling, general andadministrative expenses in the accompanying statements of operations.  In connection with the IPO, the Partnershipentered into an Amended and Restated Services Agreement with GPC which, amongother things, extended the term of the agreement through December 31, 2007.

The Partnership alsoprovides certain administrative, accounting and information processingservices, and the use of certain facilities, to Alliance Energy Corp. (“Alliance”),an affiliate of the Partnership that is 90% owned by members of the Slifkafamily.  The income from these serviceswas approximately $298,000 and $80,000 for the three months ended June 30, 2006and 2005, respectively, and $378,000 and $160,000 for the six months ended June30, 2006 and 2005, respectively.  Thesefees have been recorded as an offset to selling, general and administrativeexpenses in the statements of operations. In connection with the IPO, the Partnership entered into an Amended andRestated Services Agreement with Alliance which, among other things, extendedthe term of the agreement through December 31, 2007.

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The Partnershipsells refined petroleum products to Alliance at arm’s length and at prevailingmarket prices at the time of delivery. Sales to Alliance were $6.5 million and $4.7 million for the threemonths ended June 30, 2006 and 2005, respectively, and $11.5 million and $8.5million for the six months ended June 30, 2006 and 2005, respectively.

The table belowpresents receivables incurred in connection with the Amended and RestatedServices Agreement (or the applicable predecessor agreement, as the case maybe) between Alliance and the Partnership, and receivables (payables) incurredin connection with other transactions with affiliates (in thousands):

|                                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                             |       |                    |       |                        |       |
| Receivables from  Alliance       |       | $                       | 1,570      |                        | $          | 1,748 |   |
| (Payables)  receivables from GPC |       | (41                     | )          | 56                          |       |
| Receivables from Global  GP LLC  |       | 213                     |       | 201                         |       |
|                                  |            |                         |            |                             |            |  |  |

 

Effective October4, 2005, the General Partner employs substantially all of the Partnership’semployees and charges the Partnership for their services.  The amounts expensed for the three and sixmonths ended June 30, 2006, including payroll taxes and payroll accruals, were$4.5 million and $10.8 million, respectively. The Partnership also reimburses the General Partner for itscontributions under the General Partner’s 401(k) Savings and Profit SharingPlan and the General Partner’s qualified and non-qualified pension plans.

**Note 9.**                      Cash Distributions

The Partnershipintends to consider regular cash distributions to unitholders on a quarterlybasis, although there is no assurance as to the future cash distributions sincethey are dependent upon future earnings, cash flows, capital requirements,financial condition and other factors. The Credit Agreement prohibits the Partnerhip from making cashdistributions if any potential default or event of default, as defined in theCredit Agreement, occurs or would result from the cash distribution.

Within 45 daysafter the end of each quarter, the Partnership will distribute all of itsavailable cash (as defined in its partnership agreement) to unitholders ofrecord on the applicable record date. The amount of available cash is all cash on hand at the end of thequarter; plus all cash on hand on the date of determination of available cashfor the quarter resulting from working capital borrowings made after the end ofthe quarter; less the amount of cash reserves established by the GeneralPartner to provide for the proper conduct of the Partnership’s business, tocomply with applicable law, any of the Partnership’s debt instruments, or otheragreements or to provide funds for distributions to unitholders and to theGeneral Partner for any one or more of the next four quarters.  Working capital borrowings are generallyborrowings that are made under the Credit Agreement and in all cases are usedsolely for working capital purposes or to pay distributions to partners.

The Partnership will makedistributions of available cash from operating surplus for any quarter duringany subordination period as defined in the partnership agreement in thefollowing manner: firstly, 98% to the common unitholders, pro rata, and 2% tothe General Partner, until the Partnership distributes for each outstandingcommon unit an amount equal to the minimum quarterly distribution for thatquarter; secondly, 98% to the common unitholders, pro rata, and 2% to the GeneralPartner, until the Partnership distributes for each outstanding common unit anamount equal to any arrearages in payment of the minimum quarterly distributionon the common units for any prior quarters during the subordination period;thirdly, 98% to the subordinated unitholders, pro rata, and 2% to the GeneralPartner, until the Partnership distributes for each subordinated unit an amountequal to the minimum quarterly distribution for that quarter; and thereafter,cash in excess of the minimum quarterly distributions is distributed to theunitholders and the General Partner based on the percentages as provided in thepartnership agreement.

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The Partnershippaid the following cash distributions during 2006 (in thousands, except perunit data):

| Cash  Distribution  Payment Date | ** ** | **Per Unit  Cash**Distribution | ** ** | **Common**Units | ** ** | **Subordinated**Units | ** ** | **General**Partner | ** ** | **Total Cash**Distribution | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-----------------------|------------|--------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | ** **                          | ** ** | ** **      | ** ** | ** **            | ** ** | ** **         | ** ** | ** **                      | ** ** |
| 02/14/06                              |       | $                                   | 0.4111     |            | $2,319     |                  | $2,319     |               | $95        |                            | $4,733     |   |
| 05/15/06                              |       | 0.4250                              |       | 2,398           |       | 2,398                 |       | 98                 |       | 4,894                           |       |
| 08/14/06 (1)                          |       | 0.4375                              |       | 2,469           |       | 2,469                 |       | 101                |       | 5,039                           |       |
|                                       |            |                                     |            |                 |            |                       |            |                    |            |                                 |            |  |

 

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(1)             On July 24, 2006, the board of directors ofthe General Partner declared this distribution for the period from April 1,2006 through June 30, 2006 ($1.75 per unit on an annualized basis) to be paidon August 14, 2006 to the Partnership’s common and subordinated unitholders ofrecord as of the close of business on August 3, 2006.

**Note 10.**               Segment Reporting

The Partnership isa wholesale and commercial distributor of distillates, gasoline, residual oiland bunker fuel whose business is organized within two operating segments(Wholesale and Commercial), based on the way the chief operating decision maker(CEO) manages the business and on the similarity of customers and expectedlong-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 fiscal yearended December 31, 2005.

In the Wholesalesegment, the Partnership sells home heating oil, diesel, kerosene, unbrandedgasoline and residual oil to wholesalers, retailers and commercialcustomers.  Generally, customers usetheir own vehicles or contract carriers to take delivery of the product at bulkterminals and inland storage facilities that the Partnership owns or controlsor with which it has throughput arrangements.

The Commercialsegment includes (i) sales of home heating oil, diesel, kerosene, unbrandedgasoline and residual oil to customers in the public sector through competitivebidding and to large commercial and industrial customers, (ii) custom blendedresidual oil and distillates delivered by bunker barges or from a terminal dockand (iii) customers including federal and state agencies, municipalities, largeindustrial companies, many autonomous authorities such as transportationauthorities and water resource authorities, colleges and universities and alimited group of small utilities.  Unlikethe Wholesale segment, in the Commercial segment, the Partnership generallyarranges the delivery of the product to the customer’s designated location,typically hiring third-party common carriers to deliver the product.

The Partnership evaluatessegment performance based on net product margins before allocations ofcorporate and indirect operating costs, depreciation, amortization (includingnon-cash charges) and interest.  Based onthe way the CEO manages the business, it is not reasonably possible for thePartnership to allocate the components of operating costs and expenses betweenthe reportable segments.  Additionally,due to the commingled nature and uses of the Partnership’s assets, it is notreasonably possible for the Partnership to allocate assets between the twosegments.  There were no intersegmentsales for the periods presented below.

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Summarizedfinancial information for the Partnership’s reportable segments is presentedbelow (in thousands):

|                                             | ** ** | **Successor**                                   | ** ** | **Predecessor**                               | ** ** | **Successor**    | ** ** | **Predecessor** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| ** **                                  | ** ** | **Consolidated**                                | ** ** | **Combined**                                  | ** ** | **Consolidated** | ** ** | **Combined**    | ** ** |
| **Wholesale  Segment:**                     |       |                                            |       |                                          |       |             |       |            |       |
| Sales                                       |       | $                                               | 950,801    |                                          | $          | 684,184          |       | $               | 2,147,780  |   | $ | 1,711,346 |   |
| Net product margin (1)                      |       |                                            |       |                                          |       |             |       |            |       |
| Distillates                                 |       | $                                               | 5,992      |                                          | $          | 2,275            |       | $               | 25,589     |   | $ | 17,080 |   |
| Gasoline                                    |       | 7,166                                           |       | 4,539                                         |       | 10,402           |       | 7,144           |       |
| Residual oil                                |       | 5,266                                           |       | 5,855                                         |       | 9,920            |       | 12,438          |       |
| Total                                       |       | $                                               | 18,424     |                                          | $          | 12,669           |       | $               | 45,911     |   | $ | 36,662 |   |
| **Commercial  Segment:**                    |       |                                            |       |                                          |       |             |       |            |       |
| Sales                                       |       | $                                               | 80,552     |                                          | $          | 79,013           |       | $               | 234,596    |   | $ | 203,930 |   |
| Net product margin (1)                      |       | 2,644                                           |       | 2,241                                         |       | 7,780            |       | 7,042           |       |
| **Combined  sales and net product margin:** |       |                                            |       |                                          |       |             |       |            |       |
| Sales.                                      |       | $                                               | 1,031,353  |                                          | $          | 763,197          |       | $               | 2,382,376  |   | $ | 1,915,276 |   |
| Net product margin (1)                      |       | 21,068                                          |       | 14,910                                        |       | 53,691           |       | 43,704          |       |
| Depreciation allocated to cost of sales     |       | 424                                             |       | 419                                           |       | 830              |       | 825             |       |
| **Combined gross profit:**                  |       | $                                               | 20,644     |                                          | $          | 14,491           |       | $               | 52,861     |   | $ | 42,879 |   |

 

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(1)             Net product margin is a supplemental non-GAAPfinancial measure used by management and external users of the Partnership’sfinancial statements to assess product costs associated with the Partnership’sbusiness.  The table above reconciles netproduct margin on a combined basis to gross profit, a directly comparable GAAPmeasure.

A reconciliation of the totals reported for thereportable segments to the applicable line items in the consolidated/combinedfinancial statements is as follows (in thousands):
| ** **                                                              | ** ** | **Successor**                                   | ** ** | **Predecessor**                               | ** ** | **Successor**    | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| ** **                                                              | ** ** | **Consolidated**                                | ** ** | **Combined**                                  | ** ** | **Consolidated** | ** ** | **Combined**    | ** ** |
| **Combined  gross profit**                                              |       | $                                               | 20,644     |                                          | $          | 14,491           |       | $               | 52,861     |   | $ | 42,879 |   |
| **Operating  costs and expenses not allocated to reportable segments:** |       |                                            |       |                                          |       |             |       |            |       |
| Selling, general and administrative expenses                            |       | 9,416                                           |       | 8,193                                         |       | 19,988           |       | 17,783          |       |
| Operating expenses                                                      |       | 5,266                                           |       | 4,844                                         |       | 10,817           |       | 9,910           |       |
| Amortization expenses                                                   |       | 406                                             |       | 405                                           |       | 812              |       | 811             |       |
| Operating income                                                        |       | 5,556                                           |       | 1,049                                         |       | 21,244           |       | 14,375          |       |
| Interest expense                                                        |       | 1,786                                           |       | 1,952                                         |       | 4,106            |       | 3,978           |       |
| Income tax expense                                                      |       | 290                                             |       | —                                        |       | 970              |       | —          |       |
| **Net income (loss)**                                                   |       | $                                               | 3,480      |                                          | $          | (903             | )          | $               | 16,168     |   | $ | 10,397 |   |

 

There were no foreignsales for the three and six months ended June 30, 2006 and 2005.  The Partnership has no foreign assets.

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**Note 11.**               Capital Expenditures

The Partnership’sterminalling operations require investments to expand, upgrade or enhanceexisting operations and to meet environmental and operations regulations.  The Partnership’s capital requirementsprimarily consist of maintenance capital expenditures and capital improvementexpenditures.  Maintenance capitalexpenditures represent capital expenditures to replace partially or fullydepreciated assets to maintain the operating capacity of, or sales generatedby, existing assets and extend their useful lives such as expenditures requiredto maintain equipment reliability, tankage and pipeline integrity and safety,and to address environmental regulations. Capital improvement expenditures include expenditures to acquire assetsto grow the Partnership’s business and to expand existing facilities, such asprojects that increase operating capacity by increasing tankage or addingterminals.  Repair and maintenanceexpenses associated with existing assets that are minor in nature and do notextend the useful life of existing assets are charged to operating expenses asincurred.  The Partnership incurredapproximately $.4 million in maintenance capital expenditures for each of thethree months ended June 30, 2006 and 2005, and $.5 million and $.6 million forthe six months ended June 30, 2006 and 2005, respectively.

**Note 12.**               Recently Issued Accounting Standards

*SFAS No. 123 (revised) “Share-Based Payment”*

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (revised), “Share-Based Payment” (“SFAS 123(revised)”).  This revision prescribesthe accounting for a wide range of equity-based compensation arrangements,including share options, restricted share plans, performance-based awards,share appreciation rights and employee share purchase plans, and generally requiresthe fair value of equity-based awards to be expensed on the incomestatement.  SFAS 123 (revised) allows foreither modified prospective recognition of compensation expense or modifiedretrospective recognition.  ThePartnership adopted SFAS 123 (revised) on January 1, 2006, and the adoption ofthis standard did not have a material effect on its financial condition,results of operations or cash flows as there currently are no awardsoutstanding.

*EITF Issue No. 04-13 “Accounting forPurchases and Sales of Inventory with the Same Counterparty”*

In September 2005,the EITF issued Issue No. 04-13, “Accounting for Purchases and Sales ofInventory with the Same Counterparty” (“EITF 04-13”).  The EITF concluded that inventory purchasesand sales transactions with the same counterparty should be combined foraccounting purposes if entered into in contemplation of each other.  The EITF provided indicators to be consideredfor purposes of determining whether such transactions are entered into incontemplation of each other.  Guidancewas also provided on the circumstances under which nonmonetary exchanges ofinventory within the same line of business should be recognized at fairvalue.  The Partnership adopted EITF 04-13on April 1, 2006, and the adoption of this standard did not have a materialimpact to its financial condition, results of operations or cash flows.

*SFAS No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109”*

In June 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, “Accounting for Income Taxes.”  It also prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and it provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective as of the beginning ofthe first fiscal year beginning after December 15, 2006.  The Partnership does not believe adoption ofFIN 48 will have a material impact on the Partnership’s consolidated financialstatements.

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**Note 13.     SubsequentEvents**

As previously disclosed in a Form 8-K filed on July, 24, 2006, the Partnership’s Board of Directors declared a quarterly cash distribution of $0.4375 per unit for the period from April 1, 2006 through June 30, 2006 ($1.75 per unit on an annualized basis).  On August 14, 2006, the Partnership will pay this cash distribution to its common and subordinated unitholders of record as of the close of business August 3, 2006.

As previously disclosedin a Form 8-K filed on August 3, 2006, on August 2, 2006, the Partnershipentered into a Second Amendment (the “Amendment”) to the Credit Agreement datedOctober 4, 2005.  The Amendment modifiedthe Credit Agreement by increasing the Partnership’s $450.0 million workingcapital revolver commitment to $550.0 million (which includes two $50.0 millionseasonal overline facilities), bringing the total available commitments to$600.0 million.  All other material termsremain the same as disclosed in the Partnership’s Current Report on Form 8-Kdated October 4, 2005.

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**Item 2.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The followingdiscussion and analysis of financial condition and results of operations ofGlobal Partners LP should be read in conjunction with the historicalconsolidated financial statements of Global Partners LP and the notes theretoincluded elsewhere in this Quarterly Report on Form 10-Q.

**Forward-LookingStatements**

This QuarterlyReport on Form 10-Q contains certain forward-looking statements within themeaning of the federal securities laws. These forward-looking statements are identified as any statements thatdo not relate strictly to historical or current facts and can generally beidentified by the use of forward-looking terminology including “may,” “believe,”“expect,” “anticipate,” “estimate,” “continue” or other similar words.  Such statements may discuss futureexpectations for or contain projections of results of operations, financialcondition or our ability to make distributions to unitholders or state otherforward-looking information. Forward-looking statements are not guarantees of performance.  Although we believe these forward-lookingstatements are based on reasonable assumptions, statements made regardingfuture results are subject to a number of assumptions, uncertainties and risks,many of which are beyond our control, which may cause future results to bematerially different from the results stated or implied in this document.  These risks and uncertainties include, amongother things:

·              We may not havesufficient cash from operations to enable us to pay the minimum quarterlydistribution following establishment of cash reserves and payment of fees andexpenses, including payments to our general partner.

·              Warmer weather conditionscould adversely affect our results of operations and cash available fordistribution to our unitholders.

·              Our risk managementpolicies cannot eliminate all commodity risk. In addition, any non-compliance with our risk management policies couldresult in significant financial losses.

·              We are exposed totrade credit risk in the ordinary course of our business activities.

·              Due to our lack ofasset and geographic diversification, adverse developments in the terminalsthat we use or in our operating areas could reduce our ability to makedistributions to our unitholders.

·              We are exposed toperformance risk in our supply chain.

·              Our general partnerand its affiliates have conflicts of interest and limited fiduciary duties,which may permit them to favor their own interests to the detriment ofunitholders.

·              Unitholders havelimited voting rights and are not entitled to elect our general partner or itsdirectors or initially to remove our general partner without its consent, whichcould lower the trading price of our common units.

·              Unitholders may berequired to pay taxes on their share of our income even if they do not receiveany cash distributions from us.

Additionalinformation about risks and uncertainties that could cause actual results todiffer materially from forward-looking statements is contained in Part II, Item1A, “Risk Factors.”

All forward-lookingstatements included in this Form 10-Q and all subsequent written or oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by these cautionary statements.  The forward-looking statements speak only asof the date made, other than as required by law, and we undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

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**Overview**

***General***

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in New England.  Weare one of the largest wholesale distributors of distillates (such as homeheating oil, diesel and kerosene), gasoline, and residual oil and bunker fuelto wholesalers, retailers and commercial customers in New England.  We are also one of the largest wholesalemarketers of home heating oil in New England.

Wepurchase our refined petroleum products primarily from domestic and foreignrefiners, traders and producers and sell these products in two segments,Wholesale and Commercial.  Like mostindependent marketers of refined petroleum products, we base our pricing onspot physical prices and routinely use the New York Mercantile Exchange****(“NYMEX”)or derivatives to hedge our commodity risk inherent in buying and sellingenergy commodities.  Through the use ofregulated exchanges or derivatives, we maintain a position that issubstantially balanced between purchased volumes and sales volumes or futuredelivery obligations.  We earn a marginby selling the product for physical delivery to third parties.

OnOctober 4, 2005, we closed our initial public offering of 5,635,000 commonunits (including 735,000 common units issued pursuant to the underwriters’exercise of their over-allotment option) representing a 48.9% limited partnerinterest in us.  In connection with theclosing of this offering, (1) Global Companies LLC distributed $45.3 million incash to those affiliates of the Slifka family holding 100% of the ownershipinterests in Global Companies LLC and (2) Global Petroleum Corp., Montello OilCorporation, Larea Holdings, LLC, Larea Holdings II, LLC, Chelsea TerminalLimited Partnership and Sandwich Terminal, L.L.C. contributed all of theirownership interests in Global Companies LLC and its affiliates, Glen Hes Corp.,Global Montello Group LLC and Chelsea Sandwich LLC, to us.

Proceeds from the saleof common units in the initial public offering were used in part to repay $45.3million of borrowings under our then-existing revolving credit facility and$51.0 million of outstanding indebtedness under a term loan of Global PetroleumCorp. and certain other Slifka family entities guaranteed by affiliates ofGlobal Petroleum Corp., including Global Companies LLC and its Affiliates.

***Products and Operational Structure***

Ourproducts include distillates, gasoline and residual oil and bunker fuel.  The distillates we sell are used primarilyfor space heating of residential and commercial buildings and as fuel fortrucks and off-road construction equipment. We sell unbranded gasoline, diesel and heating oil under agreements withmajor suppliers of refined petroleum products. 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.  We sell bunker fuel, which we can customblend, to cruise ships, bulk carriers and fishing fleets.

Ourbusiness is divided into two segments:

·              *Wholesale.*  Thissegment includes sales of distillates, unbranded gasoline and residual oil tohome heating oil retailers, retail gasoline station operators and wholesaledistributors.

·              *Commercial.*  Thissegment includes sales and deliveries of distillates, unbranded gasoline,residual oil and small amounts of natural gas to customers in the public sectorand to large commercial and industrial customers, either through a competitivebidding process or through contracts of various terms.  This segment also purchases, custom blends,sells and delivers bunker fuel and diesel to cruise ships, bulk carriers andfishing fleets delivered by bunker barges.

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Ourbusiness activities are substantially comprised of purchasing, terminalling,storing and selling refined petroleum products. We believe that the combination of our terminalling and storageactivities, together with our marketing activities, provides a balance that hasa stabilizing effect on our results of operations and cash flows.  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 month for delivery to customers at higher pricesin future months.  In a backwardatedmarket (when product prices for future deliveries are lower than for currentdeliveries) because of our high turnover of inventory, we are able to minimizeour inventories and commodity risk while attempting to maintain or increase netproduct margins.

***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 primary short-term concerns anduncertainties are as follows:

·              *As a public company, we willincur significant legal, accounting and other expenses that we did not incur asa private company.*  We became a public company on September 28,2005.  Prior to that, we had no historyoperating as a public company.  Inaddition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequentlyimplemented by the Securities and Exchange Commission and the New York StockExchange, has required changes in corporate governance practices of publiccompanies.  We also expect these newrules and regulations to make it more difficult and more expensive for ourgeneral partner to obtain director and officer liability insurance, and we mayhave to reduce policy limits and coverage or incur substantially higher coststo obtain the same or similar coverage as we have obtained historically.  We are currently evaluating and monitoringdevelopments with respect to these new rules, and we cannot predict or estimatethe amount of additional costs we may incur or the timing of such costs.

·              *We commit substantial resourcesto 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 businessstrategy, we are continuously engaged in discussions with potential sellers ofterminalling, 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.  Growth in our cash flow per unit may dependon our ability to make accretive acquisitions. We may be unable to make such accretive acquisitions for a number ofreasons, including, but not limited to, the following:  (1) we are unable to identify attractiveacquisition candidates or negotiate acceptable purchase contracts with them;(2) we are unable to raise financing for such acquisitions on economicallyacceptable terms; or (3) we are outbid by competitors.  In addition, we may consummate acquisitions,which at the time of consummation we believe will be accretive, but whichultimately may not be accretive.  If anyof these events were to occur, our future growth would be limited.  We can give no assurance that our current orfuture acquisition efforts will be successful or that any such acquisition willbe completed on terms that are favorable to us. Our results of operations and financial condition, as well as those ofour competitors, will depend in part upon certain economic or industry-widefactors, including the following:

·              *Warmer weather conditionscould adversely affect our results of operations and financial condition. *Because we supply distributors whose customers depend on home heatingoil and residual oil for space heating purposes during the winter, weatherconditions have a significant impact on the demand for both home heating oiland residual oil.  As a result,warmer-than-normal temperatures during the first and fourth calendar quartersin one or more regions in which we operate can decrease the total volume wesell and the gross profit realized on those sales and, consequently, couldadversely affect our results of operations.

·              *Our financial results areseasonal and generally better in the first and fourth quarters of the calendaryear. *Demand for some of our refined petroleum products, specifically homeheating oil and residual oil for space heating purposes, is generally higherduring November through March 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 aregenerally better 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 to pay theminimum quarterly distribution to our unitholders.

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·              *Energy efficiency, newtechnology and alternative fuels, natural gas in particular, could reducedemand for our products.*  Increased conservation and technologicaladvances have adversely affected the demand for home heating oil and residualoil.  Consumption of residual oil hassteadily declined over the last three decades. We could face additional competition from alternative energy sources asa result of future government-mandated controls or regulation further promotingthe use of cleaner fuels.  Due in part tosupport for conversion to natural gas on environmental grounds, some industrialresidual oil users have switched to natural gas.  Those end users who are dual-fuel users havethe ability to switch between residual oil and natural gas.  During a period of increasing residual oil pricesrelative to the prices of natural gas, dual-fuel customers may switch tonatural gas, or over the long-term, may convert to natural gas.  Such switching or conversion could have anadverse effect on our results of operations and financial condition.

·              *New, stricter environmental lawsand regulations could significantly increase our costs, which could adverselyaffect our results of operations and financial condition.*  Ouroperations are subject to federal, state and local laws and regulationsregulating product quality specifications and other environmental matters.  The trend in environmental regulation istowards more restrictions and limitations on activities that may affect theenvironment.  Our business may beadversely affected by increased costs and liabilities resulting from such stricterlaws and regulations.  We try toanticipate future regulatory requirements that might be imposed and to planaccordingly to remain in compliance with changing environmental laws andregulations and to minimize the costs of such compliance.  However, there can be no assurances as to thetiming and type of such changes in existing laws or the promulgation of newlaws or the amount of any required expenditures associated therewith.

·              *Consolidation of the NewEngland supply network.*  In recent years, major terminals have beenacquired and their former owners have reduced or eliminated operations in thewholesale market.  The largest terminals,which form the core of the region’s supply network, are still operating but areowned by fewer companies.

**Resultsof Operations**

***Evaluating Our Results of Operations***

Our management uses avariety 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)heating degree days, (6) adjusted net income per diluted limited partner unit,(7) earnings before interest, taxes, depreciation and amortization (“EBITDA”)and (8) distributable cash 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 distillates, unbranded gasoline, residual oil and bunker fuel and naturalgas.  Product costs include the cost ofacquiring the refined petroleum products that we sell and all associated costsincluding shipping and handling costs to bring such products to the point ofsale.

*GrossProfit*

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

*Selling, General and Administrative Expenses*

OurSG&A expenses include marketing costs, corporate overhead, employeesalaries and benefits, pension and 401(k) plan expenses, discretionary bonuses,non-interest financing costs, professional fees and information technologyexpenses.  Employee-related expensesincluding employee salaries, discretionary bonuses and related payroll taxes,and benefits, pension and 401(k) plan expenses are paid by our general partnerwhich, in turn, is reimbursed for these expenses by us.  We will incur additional expenses related tobeing a public company, most of which will be the result of increasedaccounting and legal expenses.

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*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.

*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 Income Per Diluted Limited Partner Unit*

Net income perdiluted limited partner unit as dictated by EITF 03-06 is theoretical and proforma in nature and does not reflect the economic probabilities of whetherearnings for an accounting period would or could be distributed tounitholders.  The partnership agreementdoes not provide for the quarterly distribution of net income, rather, itprovides for the distribution of available cash, which is a contractuallydefined term that generally means all cash on hand at the end of each quarterafter establishment of sufficient cash reserves required to operate ourbusiness in a prudent manner. Accordingly, the distributions we historically paid and will pay infuture periods are not impacted by net income per diluted limited partner unitas dictated by EITF 03-06.  We useadjusted net income per diluted limited partner unit to measure our financialperformance on a per-unit basis. Adjusted net income per diluted limited partner unit is defined as netincome after adding back the theoretical amount allocated to the generalpartner’s interest as provided under EITF 03-06, divided by the weightedaverage number of outstanding diluted limited partner units during the period.

*EBITDA*

EBITDAis used as a supplemental financial measure by management and by external usersof our financial statements, such as investors, commercial banks and researchanalysts, 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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EBITDA should not be considered analternative to net income, operating income, cash flow from operatingactivities or any other measure of financial performance or liquidity presentedin accordance with GAAP.  EBITDA excludessome, but not all, items that affect net income and operating income, and thesemeasures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarlytitled measures of other companies.

*Distributable Cash Flow*

Distributable cash flow also is animportant non-GAAP financial measure for our limited partners since it servesas an indicator of our success in providing a cash return on theirinvestment.  Specifically, this financialmeasure indicates to investors whether or not we are generating cash flows at alevel that can sustain or support an increase in our quarterly cashdistribution.  Distributable cash flow isalso a quantitative standard used by the investment community with respect topublicly traded partnerships.  However,distributable cash flow is not a generally accepted accounting principlefinancial measure and should not be considered as an alternative to net income,cash flow from operations, or any other measure of financial performancepresented in accordance with accounting principles generally accepted in theUnited States.  In addition, ourdistributable cash flow may not be comparable to distributable cash flow orsimilarly titled measures of other companies. The generally accepted accounting measures most directly comparable todistributable cash flow are net income and cash flow from operating activities.

***Three Months Ended June 30, 2006 and 2005; SixMonths Ended June 30, 2006 and 2005***

***During the second quarter and for the six months ended June 30, 2006,we experienced increases in gross profits and net product margins across bothour wholesale and commercial segments. Commodity prices continued to rise during 2006.  Temperatures were 2.8% warmer and 7% warmerthan normal for the three and six months ended June 30, 2006, respectively, asmeasured by aggregate heating degree days.***

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The following table provides a summary of someof the key performance indicators that may be used to assess our results ofoperations.  These comparisons are notnecessarily indicative of future results (dollars in thousands, except per unitdata):
| ** **                                                | ** ** | **Successor**                                                     | ** ** | **Predecessor**                                                                       | ** ** | **Successor**                                                     | ** ** | **Predecessor**                                                                       | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended  June 30,**                   | ** ** | **Six Months Ended  June 30,**                                         | ** ** |
| ** **                                                | ** ** | **2006**                                                          | ** ** | **2005**                                                                              | ** ** | **2006**                                                          | ** ** | **2005**                                                                              | ** ** |
| ** **                                                | ** ** | **Consolidated**                                                  | ** ** | **Combined**                                                                          | ** ** | **Consolidated**                                                  | ** ** | **Combined**                                                                          | ** ** |
|                                                      |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| Adjusted net  income per diluted limited partner unit (1) |       | $          0.30 |       | $             — |       | $          1.40 |       | $             — |       |
|                                                      |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| EBITDA (2)                                                |       | $        6,644            |       | $        2,155                                |       | $      23,404                       |       | $      16,602                                           |       |
|                                                      |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| Distributable  cash flow (3)                              |       | $        4,157            |       | $             — |       | $      17,813                       |       | $             — |       |
|                                                      |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| **Wholesale  Segment:**                                   | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** |
| Volume (gallons)                                          |       | 462,087                                                           |       | 461,141                                                                               |       | 1,150,571                                                         |       | 1,213,528                                                                             |       |
| Sales                                                     |       | $    950,801                                  |       | $    684,184                                                      |       | $ 2,147,780                                                  |       | $ 1,711,346                                                                      |       |
| Net product margin (4)                                    |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| Distillates                                               |       | 5,992                                                             |       | 2,275                                                                                 |       | 25,589                                                            |       | 17,080                                                                                |       |
| Gasoline                                                  |       | 7,166                                                             |       | 4,539                                                                                 |       | 10,402                                                            |       | 7,144                                                                                 |       |
| Residual oil                                              |       | 5,266                                                             |       | 5,855                                                                                 |       | 9,920                                                             |       | 12,438                                                                                |       |
| Total                                                     |       | $      18,424                       |       | $      12,669                                           |       | $      45,911                       |       | $      36,662                                           |       |
| **Commercial  Segment:**                                  | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** |
| Volume (gallons)                                          |       | 56,827                                                            |       | 72,985                                                                                |       | 166,307                                                           |       | 201,177                                                                               |       |
| Sales                                                     |       | $      80,552                       |       | $      79,013                                           |       | $                                                                 | 234,596    |                                                                                  | $          | 203,930 |   |
| Net product margin (4)                                    |       | 2,644                                                             |       | 2,241                                                                                 |       | 7,780                                                             |       | 7,042                                                                                 |       |
| **Combined  sales and net product margin:**               | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** |
| Sales                                                     |       | $ 1,031,353                                                  |       | $    763,197                                                      |       | $                                                                 | 2,382,376  |                                                                                  | $          | 1,915,276 |   |
| Net product margin (4)                                    |       | 21,068                                                            |       | 14,910                                                                                |       | 53,691                                                            |       | 43,704                                                                                |       |
| Depreciation allocated to cost of sales                   |       | 424                                                               |       | 419                                                                                   |       | 830                                                               |       | 825                                                                                   |       |
| **Combined  gross profit**                                |       | $      20,644                       |       | $      14,491                                           |       | $                                                                 | 52,861     |                                                                                  | $          | 42,879 |   |
|                                                      |       |                                                              |       |                                                                                  |       |                                                              |       |                                                                                  |       |
| **Weather  conditions:**                                  | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** | ** **                                                        | ** ** | ** **                                                                            | ** ** |
| Normal heating  degree days                               |       | 784                                                               |       | 784                                                                                   |       | 3,654                                                             |       | 3,654                                                                                 |       |
| Actual heating  degree days                               |       | 762                                                               |       | 910                                                                                   |       | 3,397                                                             |       | 3,943                                                                                 |       |
| Variance from  normal heating degree days                 |       | (2.8                                                              | )%         | 16.1                                                                                  | %          | (7.0                                                              | )%         | 7.9                                                                                   | %          |
| Variance from prior  period actual heating degree days    |       | (16.3                                                             | )%         | 26.4                                                                                  | %          | (13.8                                                             | )%         | 3.7                                                                                   | %          |

 

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(1)             Adjustednet income per diluted limited partner unit is a non-GAAP financial measurewhich is discussed above under “Evaluating Our Operating Results.”  The table below presents a reconciliation ofadjusted net income per diluted limited partner unit to the most directlycomparable GAAP financial measure.

(2)             EBITDAis a non-GAAP financial measure which is discussed above under “Evaluating OurOperating Results.”  The table belowpresents a reconciliation of EBITDA to the most directly comparable GAAPfinancial measures.

(3)             Distributablecash flow is a non-GAAP financial measure which is discussed above under “EvaluatingOur Operating Results.”  On October 4,2005, we completed our IPO.  Accordingly,distributable cash flow is presented for the three and six months ended June30, 2006.  The table below presents areconciliation of distributable cash flow to the most directly comparable GAAPfinancial measure.

(4)             Net product margin isa supplemental non-GAAP financial measure used by management and external usersof our financial statements to assess product costs associated with ourbusiness.  The table above reconciles netproduct margin on a combined basis to gross profit, a directly comparable GAAPmeasure.

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The following tablepresents a reconciliation of adjusted net income per diluted limited partnerunit to the most directly comparable GAAP financial measure on a historicalbasis for the three and six months ended June 30, 2006:
| ** **                                                                                                                   | ** ** | **Three Months  Ended   June 30, 2006** | ** ** | **Six Months  Ended   June 30, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Reconciliation  of net income per diluted limited partner unit to adjusted net income per  diluted limited partner unit:** |       |                                                        |       |                                                      |       |
| Net income per diluted limited partner unit under  EITF 03-06                                                                |       | $                                                           | 0.30       |                                                      | $          | 1.15 |   |
| Dilutive impact of theoretical distribution of  earnings                                                                     |       | —                                                      |       | 0.25                                                      |       |
| Adjusted net  income per diluted limited partner unit                                                                        |       | $                                                           | 0.30       |                                                      | $          | 1.40 |   |

 

Thefollowing table presents a reconciliation of EBITDA to the most directlycomparable GAAP financial measures on a historical basis for each of theperiods indicated (in thousands).
| ** **                                                            | ** ** | **Successor**                    | ** ** | **Predecessor**                | ** ** | **Successor**    | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006**         | ** ** | **2005**        | ** ** |
| ** **                                                            | ** ** | **Consolidated**                 | ** ** | **Combined**                   | ** ** | **Consolidated** | ** ** | **Combined**    | ** ** |
| **Reconciliation  of net income (loss) to EBITDA:**                   |       |                             |       |                           |       |             |       |            |       |
| Net income (loss)                                                     |       | $                                | 3,480      |                           | $          | (903             | )          | $               | 16,168     |   | $ | 10,397 |   |
| Add:                                                                  |       |                             |       |                           |       |             |       |            |       |
| Depreciation and amortization                                         |       | 1,088                            |       | 1,106                          |       | 2,160            |       | 2,227           |       |
| Interest expense                                                      |       | 1,786                            |       | 1,952                          |       | 4,106            |       | 3,978           |       |
| Income tax expense                                                    |       | 290                              |       | —                         |       | 970              |       | —          |       |
| EBITDA                                                                |       | $                                | 6,644      |                           | $          | 2,155            |       | $               | 23,404     |   | $ | 16,602 |   |
|                                                                  |       |                             |       |                           |       |             |       |            |       |
| **Reconciliation  of cash flow from operating activities to EBITDA:** |       |                             |       |                           |       |             |       |            |       |
| Cash flow from operating activities                                   |       | $                                | (44,350    | )                              | $          | 186              |       | $               | 12,239     |   | $ | 40,961 |   |
| Increase (decrease) in operating assets and  liabilities              |       | 48,918                           |       | 17                             |       | 6,089            |       | (28,337         | )          |
| Interest expense                                                      |       | 1,786                            |       | 1,952                          |       | 4,106            |       | 3,978           |       |
| Income tax expense                                                    |       | 290                              |       | —                         |       | 970              |       | —          |       |
| EBITDA                                                                |       | $                                | 6,644      |                           | $          | 2,155            |       | $               | 23,404     |   | $ | 16,602 |   |

 

The following presentsreconciliations of distributable cash flow to the most directly comparable GAAPfinancial measures on a historical basis for the three and six months endedJune 30, 2006 (in thousands):
|                                                                                        | ** ** | **Three Months  Ended   June 30, 2006** | ** ** | **Six Months  Ended   June 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Reconciliation  of net income to distributable cash flow:**                          | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** |
| Net income                                                                             |       | $                                                           | 3,480      |                                                      | $          | 16,168 |   |
| Depreciation and amortization                                                          |       | 1,088                                                       |       | 2,160                                                     |       |
| Maintenance capital expenditures                                                       |       | (411                                                        | )          | (515                                                      | )          |
| Distributable cash flow                                                                |       | $                                                           | 4,157      |                                                      | $          | 17,813 |   |
| ** **                                                                             |       |                                                        |       |                                                      |       |
| **Reconciliation  of cash flow from operating activities to distributable cash flow:** |       |                                                        |       |                                                      |       |
| Cash flow from operating activities                                                    |       | $                                                           | (44,350    | )                                                         | $          | 12,239 |   |
| Increase (decrease) in operating assets and  liabilities                               |       | 48,918                                                      |       | 6,089                                                     |       |
| Maintenance capital expenditures                                                       |       | (411                                                        | )          | (515                                                      | )          |
| Distributable  cash flow                                                               |       | $                                                           | 4,157      |                                                      | $          | 17,813 |   |

 

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***ConsolidatedResults***

Ourtotal sales for the second quarter of 2006 increased $268.2 million, or 35%, to$1,031.4 million compared to $763.2 million for the same period in 2005.  Theincrease was driven by an increase in refined petroleum product prices despitean approximate 15 million gallon, or 3% decrease, to 519 million gallons inaggregate volume of product sold.  Thedecrease in aggregate volume sold includes a 20 million gallon decrease indistillates and a 5 million gallon decrease in residual oil, offset by a 10million gallon increase in gasoline.  Thenumber of actual heating degree days declined by 16% to 762 compared to 910 forthe quarters ended June 30, 2006 and 2005, respectively.  Our gross profit for the three monthsended June 30, 2006 was $20.6 million, an increase of $6.1 million, or 42%compared to $14.5 million for the same period in 2005.

Ourtotal sales for the six months ended June 30, 2006 increased $467.1 million, or24%, to $2,382.4 million compared to $1,915.3 million for the same period in2005.  The increase was due to an increase in refined petroleum product pricesdespite an approximate 98 million gallon, or 7% decrease, to 1,317 milliongallons in aggregate volume of product sold for the six months ended June 30,2006.  The decrease in aggregate volumesold primarily includes a 106 million gallon decrease in distillates and a 17million gallon decrease in residual oil, offset by a 22 million gallon increasein gasoline.  The number of actualheating degree days declined by 14% to 3,397 compared to 3,943 for the sixmonths ended June 30, 2006 and 2005, respectively.  Our gross profit for the six monthsended June 30, 2006 was $52.9 million, an increase of $10.0 million, or 23%compared to $42.9 million for the same period in 2005.  The increases in our gross profits for thethree and six months ended June 30, 2006 were primarily due to higher marginsfor our products.

*Wholesale Segment*

Distillates.  Wholesale distillate sales for the threemonths ended June 30, 2006 were $424.3 million compared to $344.5 million forthree months ended June 30, 2005.  Duringthe first six months of 2006, wholesale distillate sales were $1,284.8 millioncompared to $1,121.8 million for the same period in 2005.  The increases of $79.8 million, or 23%, and$163.0 million, or 15%, for the three and six months ended June 30, 2006,respectively, were due to increases indistillate prices despite decreases of 8% and 13% in distillate volume sold forthe respective periods.  We attribute thedecreases in volume sold to the expiration of supply contracts in the ordinarycourse of business and a reduction in bulk sales transactions to local competitors.

Our net product margin contribution from distillatesales increased by $3.7 million, or 163%, to $6.0 million for the three monthsended June 30, 2006 and by $8.5 million, or 50%, to $25.6 million for the sixmonths ended June 30, 2006.  These increaseswere, in part, the result of our ability to pass through to customers ourincreased costs related to sales.

Gasoline.  Wholesale gasoline sales for the three monthsended June 30, 2006 were $497.7 million compared to $326.2 million for thethree months ended June 30, 2005.  Duringthe first six months of 2006, wholesale gasoline sales were $804.3 millioncompared to $560.4 million for the same period in 2005.  The increasesof $171.5 million, or 53%, and $243.9 million, or 44%, for the three and sixmonths ended June 30, 2006, respectively, were due to increases in gasoline prices and increases of4% and 6% in volume sold for the respective periods.

Ournet product margin from gasoline sales increasedby $2.6 million, or 58%, to $7.2 million for the three months ended June 30,2006 and by $3.3 million, or 46%, to $10.4 million for the six months endedJune 30, 2006.  We attribute these increases in net product margin to increasesin our volume of sales as well as sales to higher margin customers.

ResidualOil.  Wholesale residualoil sales for the three months ended June 30, 2006 were $28.8 million comparedto $13.5 million for the three months ended June 30, 2005.  During the first six months of 2006, residualoil sales were $58.6 million compared to $29.1 million for the same period in2005.  The increases of $15.3 million, or114%, and $29.5 million, or 101% for the three and six months ended June 30,2006 were the result of increases inresidual oil prices and increases of 68% and 46% in residual oil volume soldfor the respective periods.

Ournet product margin contribution from residual oil sales decreased $.6 million,or 10%, to $5.3 million, for the three months ended June 30, 2006 and $2.5million, or 20%, to $9.9 million for the six months ended June 30, 2006,primarily due to a per unit margin reduction.

 

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* *

*CommercialSegment*

* *

Inour Commercial segment, residual oil accounted for approximately 78% and 82% oftotal volume sold for the three months ended June 30, 2006 and 2005,respectively, and approximately 82% and 83% of total volume sold for the sixmonths ended June 30, 2006 and 2005, respectively. Distillates, gasoline andnatural gas accounted for the remainder of the total volume sold.

 

Commercialresidual oil sales for the quarter ended June 30, 2006 decreased by 21%compared to the same period in 2005 due to a 39% decrease in volume sold. Forthe six months ended June 30, 2006, residual oil sales increased $3.9 million,or 3%, compared to the same period in 2005, despite a 32 million gallon, or26%, decrease in volume sold. We attribute the decreases in volume sold to theclosure of plants and/or reductions in production by certain cyclical industryparticipants in our territory.

 

*Selling, General and Administrative*

 

SG&Aexpenses increased by $1.2 million, or 15%, to $9.4 million for the threemonths ended June 30, 2006 compared to $8.2 million for the same period in2005. The increase was primarily due to accrued bonuses of $.2 million andexpenses associated with becoming a public company, including increasedexpenses in audit and tax review fees of approximately $.5 million, directorand officer insurance fees of $.1 million, Schedule K-1 preparation anddistribution expenses of $.3 million and Sarbanes-Oxley 404 compliance,planning and documentation of $.2 million.

 

Duringthe six months ended June 30, 2006, SG&A expenses increased by $2.2million, or 12%, to $20.0 million compared to $17.8 million for the same periodin 2005. The increase was primarily due to accrued bonuses of $.4 million andexpenses associated with becoming a public company, including increasedexpenses in audit and tax review fees of approximately $.7 million, directorand officer insurance fees of $.3 million, Schedule K-1 preparation anddistribution expenses of $.3 million and Sarbanes-Oxley 404 compliance,planning and documentation of $.5 million.

 

*OperatingExpenses*

* *

Operatingexpenses increased by $.4 million, or 9%, to $5.3 million for the three monthsended June 30, 2006 compared to $4.8 million for the same period in 2005. Theincrease was primarily due to repair and maintenance expenses of $.1 million atthe terminal in Chelsea, Massachusetts, a $.2 million increase in rent foradditional tankage at the Capitol Terminal in East Providence, Rhode Island,and $.1 million in costs in connection with the expiration of the New Bedfordterminal lease.

 

Operatingexpenses for the six months ended June 30, 2006 increased by $.9 million, or9%, to $10.8 million compared to $9.9 million for the same period in 2005. Theincrease was primarily due to pipeline repair expenses of $.3 million and otherrepair and maintenance expenses of $.2 million at the terminal in Chelsea,Massachusetts, a $.3 million increase in rent for additional tankage at theCapitol Terminal in East Providence, Rhode Island, and $.1 million in costs inconnection with the expiration of the New Bedford terminal lease.

 

*Amortization expense*

 

Amortizationexpense was $.4 million for each of the three months ended June 30, 2006 and2005 and $.8 million for each of the six months ended June 30, 2006 and 2005.

 

***Interest expense***

*** ***

***Interest expense for the three months ended June 30, 2006decreased by $.2 million, or 9%, to $1.8 million compared to $2.0 million forthe same period in 2005. Interest expense for the six months ended June 30,2006 increased by $.1 million, or 3%, to $4.1 million compared to $4.0 millionfor the same period in 2005. We attribute the***increase to a rise in themarket prices for products and the resulting increased costs of carryinginventory and accounts receivable.

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*** ***

**Liquidity and CapitalResources**

** **

***Liquidity***

** **

Our primary liquidityneeds are to fund our capital expenditures and our working capital requirements.Cash generated from operations and our working capital revolving creditfacility provides our primary sources of liquidity. Working capital was $234.1million at June 30, 2006 compared to $228.7 million at December 31, 2005.

 

***CapitalExpenditures***

*** ***

Our terminallingoperations require investments to expand, upgrade or enhance existingoperations and to meet environmental and operations regulations. Our capitalrequirements primarily consist of maintenance capital expenditures and capitalimprovement expenditures. Maintenance capital expenditures represent capitalexpenditures to replace partially or fully depreciated assets to maintain theoperating capacity of, or sales generated by, existing assets and extend theiruseful lives, such as expenditures required to maintain equipment reliability,tankage and pipeline integrity and safety, and to address environmentalregulations. Capital improvement expenditures include expenditures to acquireassets to grow our business and to expand existing facilities, such as projectsthat increase operating capacity by increasing tankage or adding terminals. Repairand maintenance expenses associated with existing assets that are minor innature and do not extend the useful life of existing assets are charged tooperating expenses as incurred. We incurred a total of approximately $.4million in maintenance capital expenditures for each of the three months endedJune 30, 2006 and 2005, and $.5 million and $.6 million for the six monthsended June 30, 2006 and 2005, respectively.

 

We anticipate that suchmaintenance capital expenditures will be funded with cash generated byoperations. We anticipate that future capital improvement requirements will beprovided through long-term borrowings or other debt financings and/or equityofferings. We believe that we have sufficient liquid assets, cash flow fromoperations and borrowing capacity under our credit agreement to meet ourfinancial commitments, debt service obligations, contingencies and anticipatedcapital expenditures. However, we are subject to business and operational risksthat could adversely affect our cash flow. A material decrease in our cashflows would likely produce a corollary adverse effect on our borrowingcapacity.

 

***CashFlows***

*** ***

The following tablesummarizes cash flow activity (in thousands):

 

|                                            | ** ** | **Successor**                  | ** ** | **Predecessor** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **Six Months Ended** | ** ** |
| ** **                                 | ** ** | **June 30,**              | ** ** |
| ** **                                 | ** ** | **2006**                       | ** ** | **2005**        | ** ** |
| ** **                                 | ** ** | **Consolidated**               | ** ** | **Combined**    | ** ** |
|                                       |       |                           |       |            |       |
| Net cash  provided by operating activities |       | $                              | 12,239     |            | $          | 40,961 |   |
| Net cash used in  investing activities     |       | $                              | (5,494     | )               | $          | (621 | ) |
| Net cash used in  financing activities     |       | $                              | (7,574     | )               | $          | (42,631 | ) |

 

Netcash provided by operating activities decreased $28.7 million to $12.2 millionfor the six months ended June 30, 2006 from $41.0 million for the six monthsended June 30, 2005. Net income increased $5.8 million to $16.2 million for thesix months ended June 30, 2006 from $10.4 million for the six months ended June30, 2005. Total working capital items decreased $6.3 million for the six monthsended June 30, 2006 as compared to an increase of $28.3 million for the sixmonths ended June 30, 2005.

 

Cash flow from operating activities generally increasesduring the second quarter since accounts receivable, accounts payable andinventories generally contract as the Partnership enters the season when salesfrom heat-based products are lower. Because of fluctuations in the price ofpetroleum products in the six months ended June 30, 2006, we elected touse our storage capacity to carry increased inventories of petroleum products,which resulted in reduced net cash provided by operating activities for the sixmonths ended June 30, 2006 as compared to the six months endedJune 30, 2005. Through the use of regulated exchanges or derivatives, wemaintain a position that is substantially balanced with respect to suchinventories.

 

Net cash used ininvesting activities increased $4.9 million to $5.5 million for the six monthsended June 30, 2006 from $.6 million for the same period in 2005, primarilyattributable to the $2.3 million acquisition of the Bridgeport, Connecticut,terminal in May of 2006 and $2.7 million in capital improvement expendituresfor the six months ended June 30, 2006.

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Net cash used infinancing activities decreased $35.1 million to $7.6 million for the six monthsended June 30, 2006 from $42.6 million for the same period in 2005. For the sixmonths ended June 30, 2006, we paid cash distributions of $9.6 million to ourcommon and subordinated unitholders and had proceeds of $2.2 million from ofour revolving credit facility to finance business operations. For the sixmonths ended June 30, 2005, we paid cash distributions of $7.5 million to ourcommon and subordinated unitholders and made payments on our credit facility of$35.0 million.

 

***CreditAgreement***

 

In November 2005, we, ourgeneral partner, our operating company and our operating subsidiaries amendedour four-year senior secured credit agreement to increase total availablecommitments thereunder from $400.0 million, as further described below, to$500.0 million. The working capital revolving credit facility was increased by$100.0 million, comprised of a $50.0 million increase in the permanent workingcapital revolving credit facility commitment and a new seasonal overlinefacility of $50.0 million (which is available each year only during the periodbetween September (1)st and June 30th.) As of June 30, 2006, we had borrowingsoutstanding under our working capital revolving credit facility of $183.8million and outstanding letters of credit of $42.0 million, for a totalindebtedness of $225.8 million.

 

The credit facilities areavailable to fund working capital, make acquisitions and provide payment forgeneral partnership purposes. There are three facilities under our creditagreement:

 

·              a working capitalrevolving credit facility to be used for working capital purposes and lettersof credit in the principal amount equal to the lesser of our borrowing base and$450.0 million, of which two $50.0 million seasonal overline facilities areavailable each year only during the period between September 1st and June 30th;

 

·              a $35.0 millionacquisition facility to be used for funding acquisitions similar to ourbusiness line that have a purchase price of $25.0 million or less or $35.0million or less in the aggregate in any 12-month period; and

 

·              a $15.0 millionrevolving credit facility to be used for general purposes, including payment ofdistributions to our unitholders.

 

Our obligations under thecredit agreement are secured by substantially all of our assets and the assetsof our operating company and operating subsidiaries.

 

Indebtedness under thecredit agreement is guaranteed by our general partner. Pursuant to theagreement, interest on borrowings under our working capital revolving credit,acquisition credit, and revolving credit facilities is payable at our optionat: (1) the Eurodollar rate, plus 1%, 13⁄4% and 11⁄2 %, respectively, (2) the costof funds rate,****plus 1%, 13⁄4% and 11⁄2 %,respectively**,** or (3) the bank’s base rate (theaverage rates for the three and six months ended June 30, 2006 wereapproximately 6.0% and 5.8%, respectively). We incur a letter of credit fee of1% per annum for each letter of credit issued. In addition, we incur acommitment fee on the unused portion of the three facilities (including anyseasonal overline facility exercised by us) under the credit agreement at arate of 25 basis points per annum, a facility fee of 10 basis points per annumon any unexercised seasonal overline facility during the period betweenSeptember 1st and June 30th, and a seasonal overline fee of $30,000each time we elect to exercise either of the seasonal overline facilities. Thecredit agreement will mature in October of 2009. At that time, the creditagreement will terminate and all outstanding amounts thereunder will be due andpayable, unless the credit agreement is amended.

 

The credit agreementprohibits us from making distributions to unitholders if any potential defaultor event of default, as defined in the credit agreement, occurs or would resultfrom the distribution. In addition, the credit agreement contains variouscovenants that may limit, among other things, our ability to:

 

·              grant liens;

 

·              make certain loansor investments;

 

·              incur additionalindebtedness or guarantee other indebtedness;

 

·              make any materialchange to the nature of our business or undergo a fundamental change;

 

·              make any materialdispositions;

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·              acquire anothercompany;

 

·              enter into a merger,consolidation, sale leaseback transaction or purchase of assets;

 

·              make distributionsif any potential default or event of default occurs; or

 

·              make capitalexpenditures in excess of specified levels.

 

The credit agreement also contains financial covenantsrequiring us to maintain:

 

·              minimum workingcapital of $25.0 million through March 31, 2006 and $30.0 million thereafter;

 

·              minimum EBITDA (asdefined in the credit agreement) of $20.0 million;

 

·              a minimum EBITDAless capital expenditures to interest coverage ratio of 2.75 to 1; and

 

·              a maximum leverage to minimum EBITDAratio of 2.5 to 1 with respect to the aggregate amount of borrowingsoutstanding under the $15.0 million revolving credit facility and the $35.0million acquisition facility and other funded indebtedness.

 

If an event of defaultexists under the credit agreement, the lenders are able to accelerate thematurity of the credit agreement and exercise other rights and remedies. Each ofthe following could be an event of default:

 

·              failure to pay anyprincipal when due or any interest, fees or other amounts when due;

 

·              failure of anyrepresentation or warranty to be true and correct in any material respect;

 

·              failure to performor otherwise comply with the covenants in the credit agreement or in other loandocuments to which we are a borrower;

 

·              any default in theperformance of any obligation or condition beyond the applicable grace periodrelating to any other indebtedness of more than $2.0 million if the effect ofthe default is to permit or cause the acceleration of the indebtedness;

 

·              a judgment defaultfor monetary judgments exceeding $2.0 million or a default under anynonmonetary judgment if such default could have a material adverse effect onus;

 

·              a change inmanagement or ownership control; and

 

·              an ERISA violation or a bankruptcy orinsolvency event involving us, our general partner or any of our subsidiaries.

 

The credit agreementlimits distributions to our unitholders to available cash, and borrowings tofund such distributions are only permitted under the $15.0 million revolvingcredit facility. The $15.0 million revolving credit facility is subject to anannual “clean-down” period, requiring us to reduce the amount outstanding underthe $15.0 million revolving credit facility to $0 for 30 consecutive calendardays in each calendar year.

 

In August 2006, weentered into a Second Amendment to the Credit Agreement to increase thepermanent working capital revolving credit facility commitment by $100.0million for total available commitments of $600.0 million (see Note 13).

 

***Off-BalanceSheet Arrangements***

 

We have no off-balancesheet arrangements.

 

***CriticalAccounting Policies and Estimates***

** **

Management’s Discussionand Analysis of Financial Condition and Results of Operations discusses ourconsolidated/combined financial statements, which have been prepared inaccordance with GAAP. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results may differfrom these estimates under different assumptions or conditions.

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These estimates are basedon our knowledge and understanding of current conditions and actions that wemay take in the future. Changes in these estimates will occur as a result ofthe passage of time and the occurrence of future events. We have identified thefollowing estimates that, in our opinion, are subjective in nature, require theexercise of judgment, and involve complex analysis: inventory, leases, revenuerecognition, derivative financial instruments and environmental and otherliabilities.

 

The significantaccounting policies and estimates that we have adopted and followed in thepreparation of our consolidated/combined financial statements are detailed inItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Critical Accounting Policies and Estimates” and Note 2of Notes to Financial Statements, “Summary of Significant Accounting Policies”included in our Annual Report on Form 10-K for the fiscal year ended December31, 2005. There have been no subsequent changes in these policies and estimatesthat had a significant impact on our financial condition and results ofoperations for the periods covered in this report.

 

**Recently Issued AccountingStandards**

 

A description and relatedimpact expected from the adoption of certain new accounting pronouncements isprovided in Note 12 of Notes to Financial Statements.

 

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

 

Market risk is the riskof loss arising from adverse changes in market rates and prices. The principalmarket risks to which we are exposed are interest rate risk and commodity risk.We utilize various derivative instruments to manage exposure to commodity risk.Because the outstanding amount under our credit facility fluctuates due tocommodity prices and the seasonality of our business, we have chosen currentlyand historically not to enter into any hedging instruments related to ourvariable rate debt.

 

***InterestRate Risk***

 

We utilize variable ratedebt and are exposed to market risk due to the floating interest rates on ourcurrent credit facility and term loan. Therefore, from time to time, we mayutilize interest rate swaps and collars to hedge interest obligations onspecific and anticipated debt issuances. We had no interest rate hedging instruments outstanding as of June 30,2006. Borrowings under our working capital revolving credit, acquisitioncredit and revolving credit facilities currently bear interest at our option at(1) the Eurodollar rate, plus 1%, 13⁄4% and 11⁄2 %, respectively, (2) the cost offunds rate, plus 1%, 13⁄4% and 11⁄2 %, respectively, or (3) the bank’s base rate. Asof June 30, 2006, we had borrowings outstanding under our working capital revolvingcredit facility of $183.8 million. The impact of a 1% increase in the interestrate on this amount of debt would have resulted in an increase in interestexpense, and a corresponding decrease in our results of operations, ofapproximately $1.8 million annually, assuming, however, that our indebtednessremained constant throughout the year.

 

***CommodityRisk***

 

We hedge our exposure toprice fluctuations with respect to refined petroleum products in storage andexpected purchases and sales of these commodities. The derivative instrumentsutilized consist primarily of futures and option contracts traded on the NYMEXand over-the-counter transactions, including swap contracts entered into withestablished financial institutions and other credit-approved energy companies. Ourpolicy is generally to purchase only products for which we have a market and tostructure our sales contracts so that price fluctuations do not materiallyaffect the profit we receive. While our policies are designed to minimizemarket risk, some degree of exposure to unforeseen fluctuations in marketconditions remains. Except for the controlled trading program discussed below,we do not acquire and hold futures contracts or other derivative products forthe purpose of speculating on price changes that might expose us toindeterminable losses.

 

While we seek to maintaina position that is substantially balanced within our product purchaseactivities, we may experience net unbalanced positions for short periods oftime as a result of variances in daily sales and transportation and deliveryschedules as well as logistical issues associated with inclement weatherconditions. In connection with managing these positions and maintaining aconstant presence in the marketplace, both necessary for our business, weengage in a controlled trading program for up to an aggregate of 250,000barrels of refined petroleum products.

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We enter into futurecontracts to minimize or hedge the impact of market fluctuations on ourpurchase and fixed forward sales of refined petroleum products. Any hedgeineffectiveness is reflected in our results of operations. We utilize theNYMEX, which is a regulated exchange for energy products that it trades,thereby reducing potential delivery and supply risks. Generally, our practiceis to close all NYMEX positions rather than to make or receive physicaldeliveries. With respect to other energy products, we enter into derivativeagreements with counterparties that we believe have a strong credit profile, inorder to hedge market fluctuations and/or lock-in margins relative to ourcommitments.

 

At June 30, 2006, thefair value of all of our commodity risk derivative instruments and the changein fair value that would be expected from a 10% price decrease are shown in thetable below (in thousands):

 

Gain (loss):

 

|                                | ** ** | **Fair Value at** | ** ** | **Effect of 10%** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **June 30, 2006** | ** ** | **Price Decrease**     | ** ** |
|                           |       |                        |       |                        |       |
| NYMEX contracts                |       | $                           | 1,288      |                        | $          | (4,853 | ) |
| Swaps, options  and other, net |       | 1,646                       |       | 4,111                       |       |
|                           |       | $                           | 2,934      |                        | $          | (742 | ) |

 

The fair values of thefutures contracts are based on quoted market prices obtained from the NYMEX. Thefair value of the swaps and option contracts are estimated based on quotedprices from various sources such as independent reporting services, industrypublications and brokers. These quotes are compared to the contract price ofthe swap, which approximates the gain or loss that would have been realized ifthe contracts had been closed out at June 30, 2006. For positions whereindependent quotations are not available, an estimate is provided, or theprevailing market price at which the positions could be liquidated is used. Allhedge positions offset physical exposures to the spot market; none of theseoffsetting physical exposures are included in the above table. Price-risksensitivities were calculated by assuming an across-the-board 10% decrease inprice regardless of term or historical relationships between the contractualprice of the instruments and the underlying commodity price. In the event of anactual 10% change in prompt month prices, the fair value of our derivativeportfolio would typically change less than that shown in the table due to lowervolatility in out-month prices. We have a daily margin requirement to maintaina cash deposit with our broker based on the prior day’s market results on openfutures contracts. The balance of this deposit will fluctuate based on our openmarket positions and the commodity exchange’s requirements. The requiredbrokerage margin balance was $5.5 million at June 30, 2006.

 

We are exposed to creditloss in the event of nonperformance by counterparties of forward contracts,options and swap agreements, but do not anticipate nonperformance by any ofthese counterparties. Futures contracts, the primary derivative instrument utilized,are traded on regulated exchanges, greatly reducing potential credit risks. Exposureon swap and certain option agreements is limited to the amount of the recordedfair value as of the balance sheet dates. We utilize primarily one broker forall derivative transactions and the right of offset exists. Accordingly, thefair value of all derivative instruments is displayed on a net basis.

 

**Item 4.**                          Controls and Procedures

 

In designing and evaluating controls andprocedures, our management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

Our management, with the participation of ourprincipal executive officer and principal financial officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “ExchangeAct”)) as of the fiscal quarter ended June 30, 2006. Based on this evaluation,our principal executive officer and principal financial officer have concludedthat our disclosure controls and procedures are effective to ensure that theinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms.

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There has not been anychange in our internal control over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act) that occurred during the fiscal quarter ended June 30,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.**                          Legal Proceedings

 

***General***

 

Although we may, fromtime to time, be involved in litigation and claims arising out of ouroperations in the normal course of business, we do not believe that we are aparty to any litigation that will have a material adverse impact on ourfinancial condition or results of operations. Except as described below, we arenot aware of any significant legal or governmental proceedings against us, orcontemplated to be brought against us. 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 thatthis insurance will be adequate to protect us from all material expensesrelated to potential future claims for personal and property damage or thatthese levels of insurance will be available in the future at economical prices.

 

***Environmental***

 

Global Companies LLC, inaddition to several affiliates, has been named as one of over 50 defendants intwo lawsuits alleging methyl tertiary-butyl ether (“MTBE”) contamination ofgroundwater in Massachusetts. MTBE is an oxygenate that has been usedextensively to reduce motor vehicle tailpipe emissions. In the cases of Town ofDuxbury, et al. v. Amerada Hess Corp., et al., filed December 31, 2003, andCity of Lowell v. Amerada Hess Corp., et al., filed December 30, 2004,plaintiffs allege that manufacturers, refiners and others involved in the distributionof gasoline containing MTBE are liable for the costs of investigating possibleMTBE groundwater contamination, treating such contaminated groundwater wherefound, and related relief including treble damages and injunctive relief. Theplaintiffs in these cases generally claim to be public water providers ormunicipal or other government authorities. These cases have been consolidatedin multi-district litigation with over 60 other MTBE cases in federal court inthe Southern District of New York. We intend to vigorously defend these cases. Wedo not believe that these cases will have a material impact on our operationsalthough we can provide no assurances in this regard.

 

On November 29, 2004, aconsent decree was lodged by the U.S. Department of Justice in the federalDistrict Court for Massachusetts whereby Global Companies LLC and GlobalPetroleum Corp. settled alleged violations of Clean Air Act regulations relatedto fuel quality specifications. This consent decree was entered by the court onJanuary 21, 2005. As part of this settlement, Global Companies LLC has paid a$500,000 civil penalty and instituted a compliance program for three years toensure compliance with Clean Air Act fuel quality specifications. The allegedviolations stemmed from the importation of finished conventional gasoline,which was not a substantial part of our operations at the time of the allegedviolations. We do not believe that compliance with the terms of the consentdecree will result in material costs.

 

***Other***

 

On September 15, 2005,the Office of the Attorney General of the Commonwealth of Massachusetts issueda Civil Investigative Demand to us in connection with an investigation ofgasoline distributors and retailers in Massachusetts in the wake of HurricaneKatrina. We believe that the Attorney General’s office has issued similardemands to other distributors and retailers. We have taken steps to comply withthe demand. While we cannot predict the outcome of the investigation, we do notexpect that the outcome will have a material adverse effect on us.

 

On November 22, 2005, theU.S. Federal Trade Commission (“FTC”) issued a Civil Investigative Demand to usin connection with an investigation of petroleum products pricing by refinersand distributors. We complied with the demand. On May 22, 2006, the FTC issueda press release announcing the release of its report entitled “Investigation ofGasoline Price Manipulation and Post-Katrina Gasoline Price Increases.” Inlight of the completion of the FTC’s investigation and the issuance of itsreport, we do not expect that the outcome of this investigation will have amaterial adverse effect on us.

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**Item 1A.**                 Risk Factors

 

There have been nomaterial changes to the Risk Factors disclosed in the Partnership’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2005.

 

**Item 6.**                          Exhibits

 

| 10.1       | — | Employment Agreement between Global GP LLC and  Thomas J. Hollister dated April 19, 2006 (incorporated herein by reference to  Exhibit 99.1 to Form 8-K for Global Partners LP filed on May 11, 2006) |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                  |
| 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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†                     Notdeemed “filed” for purposes of Section 18 of the Securities Exchange Act of1934 or otherwise subject to the liability of that section.

33

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | **GLOBAL  PARTNERS LP** |
|------------------------|-------------------------|
|                   | By:                     | Global GP LLC, |
|                   |                    | its general partner |
|                   |                    |   |
|                   |                    |   |
| Dated: August 14, 2006 |                    | By: | /s/ Eric Slifka |   |
|                   |                    |   | Eric Slifka |
|                   |                    |   | President and Chief  Executive Officer |
|                   |                    |   | (Principal Executive  Officer) |
|                   |                    |   |
|                   |                    |   |
| Dated: August 14, 2006 |                    | By: | /s/ Thomas J.  Hollister |   |
|                   |                    |   | Thomas J. Hollister |
|                   |                    |   | Executive Vice  President and Chief Financial Officer |
|                   |                    |   | (Principal Financial  Officer) |

 

34

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**INDEX TO EXHIBITS**

 

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                       |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                  |
| 10.1                | — | Employment Agreement between Global GP LLC and  Thomas J. Hollister dated April 19, 2006 (incorporated herein by reference to  Exhibit 99.1 to Form 8-K for Global Partners LP filed on May 11, 2006) |
|                |   |                                                                                                                                                                                                  |
| 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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**†****                     **Notdeemed “filed” for purposes of Section 18 of the Securities Exchange Act of1934 or otherwise subject to the liability of that section.

 

35

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