Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **x**                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**   |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                 |
| **For the  quarterly period ended March 31, 2009**                                                                    |
| ** **                                                                                                                 |
| **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**

(Exactname of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Date File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files.    Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

The issuer had 7,428,139 common units and 5,642,424subordinated units outstanding as of May 5, 2009.

 

 

 

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Table ofContents

 

**TABLE OFCONTENTS**

 
| **PART I.          FINANCIAL INFORMATION**                                                      | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** |
| **Item 1.        Financial Statements**                                                                        | ** ** |
| ** **                                                                                                                                        | ** ** |
| Consolidated  Balance Sheets as of March 31, 2009 and December 31, 2008                                                                 |       |
|                                                                                                                                              |       |
| Consolidated  Statements of Income for the three months ended March 31, 2009 and 2008                                                        |       |
|                                                                                                                                              |       |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2009 and  2008                                                   |       |
|                                                                                                                                              |       |
| Consolidated Statements of Partners’ Equity for the  three months ended March 31, 2009                                                  |       |
|                                                                                                                                              |       |
| Notes to Consolidated Financial Statements                                                                                                        |       |
|                                                                                                                                              |       |
| **Item 2.        Management’s Discussion and Analysis  of Financial Condition and Results of Operations** | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 3.        Quantitative and Qualitative  Disclosures about Market Risk**                                 | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 4.        Controls and Procedures**                                                                     | ** ** |
| ** **                                                                                                                                        | ** ** |
| **PART II.  OTHER INFORMATION**                                                                                                              | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item  1.        Legal Proceedings**                                                                          | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item  1A.     Risk Factors**                                                                                                | ** ** |
| ** **                                                                                                                                        | ** ** |
| **Item 6.        Exhibits**                                                                                    | ** ** |
| ** **                                                                                                                                        | ** ** |
| **SIGNATURES**                                                                                                                                    | ** ** |
| ** **                                                                                                                                        | ** ** |
| **INDEX  TO EXHIBITS**                                                                                                                            | ** ** |

 

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Table ofContents

 

**Item 1.    Financial Statements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

** **
| ** **                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                        |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                              |       | $                  | 2,989      |                  | $          | 945 |   |
| Accounts receivable less allowance, net                                                                                                |       | 228,332            |       | 249,418               |       |
| Accounts receivable—affiliates                                                                                                    |       | 1,096              |       | 2,518                 |       |
| Inventories                                                                                                                            |       | 227,852            |       | 240,346               |       |
| Brokerage margin deposits                                                                                                              |       | 13,178             |       | 8,991                 |       |
| Fair value of forward fixed price contracts                                                                                            |       | 58,359             |       | 161,787               |       |
| Prepaid expenses and other current assets                                                                                              |       | 29,686             |       | 29,302                |       |
| Total current assets                                                                                                                   |       | 561,492            |       | 693,307               |       |
| Property and equipment, net                                                                                                            |       | 161,527            |       | 161,988               |       |
| Intangible assets, net                                                                                                                 |       | 30,732             |       | 31,403                |       |
| Other assets                                                                                                                           |       | 3,729              |       | 2,564                 |       |
| Total assets                                                                                                                           |       | $                  | 757,480    |                  | $          | 889,262 |   |
| ** **                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Liabilities and partners’ equity**                                                                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                   |       |               |       |                  |       |
| Accounts payable                                                                                                                       |       | $                  | 159,602    |                  | $          | 219,783 |   |
| Working capital revolving credit facility—current portion                                                                         |       | 78,186             |       | 208,210               |       |
| Environmental liabilities—current portion                                                                                         |       | 4,206              |       | 4,191                 |       |
| Accrued expenses and other current liabilities                                                                                         |       | 64,059             |       | 54,054                |       |
| Income taxes payable                                                                                                                   |       | 591                |       | 520                   |       |
| Obligations on forward fixed price contracts and other derivatives                                                                     |       | 13,244             |       | 7,954                 |       |
| Total current liabilities                                                                                                              |       | 319,888            |       | 494,712               |       |
| Working capital revolving credit facility—less current portion                                                                    |       | 183,914            |       | 154,090               |       |
| Acquisition facility                                                                                                                   |       | 71,200             |       | 71,200                |       |
| Environmental liabilities—less current portion                                                                                    |       | 2,344              |       | 2,377                 |       |
| Accrued pension benefit cost                                                                                                           |       | 9,536              |       | 8,853                 |       |
| Deferred compensation                                                                                                                  |       | 1,708              |       | 1,663                 |       |
| Other long-term liabilities                                                                                                            |       | 11,653             |       | 12,899                |       |
| Total liabilities                                                                                                                      |       | 600,243            |       | 745,794               |       |
| ** **                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Partners’ equity**                                                                                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Common unitholders (7,428,139 units issued and outstanding at  March 31, 2009 and December 31, 2008)                         |       | 170,486            |       | 163,092               |       |
| Subordinated unitholders (5,642,424 units issued and outstanding at  March 31, 2009 and December 31, 2008)                   |       | 1,062              |       | (4,189                | )          |
| General partner interest (1.73% interest with 230,303 equivalent  units outstanding at March 31, 2009 and December 31, 2008) |       | 42                 |       | (172                  | )          |
| Accumulated other comprehensive loss                                                                                                   |       | (14,353            | )          | (15,263               | )          |
| Total partners’ equity                                                                                                            |       | 157,237            |       | 143,468               |       |
| Total liabilities and partners’ equity                                                                                            |       | $                  | 757,480    |                  | $          | 889,262 |   |

 

**The accompanying notes are an integral part of theseconsolidated financial statements.**

 

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF INCOME**

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

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2009**                                               | ** ** | **2008** | ** ** |
|                                                                                          |       |                                                   |       |   |   |
| Sales                                                                                         |       | $                                                      | 1,632,955  |   | $ | 2,720,992 |   |
| Cost of sales                                                                                 |       | 1,582,241                                              |       | 2,685,376 |   |
| Gross profit                                                                                  |       | 50,714                                                 |       | 35,616 |   |
|                                                                                          |       |                                                   |       |   |   |
| Costs and operating expenses:                                                                 |       |                                                   |       |   |   |
| Selling, general and administrative expenses                                                  |       | 18,075                                                 |       | 11,073 |   |
| Operating expenses                                                                            |       | 8,475                                                  |       | 9,025 |   |
| Amortization expenses                                                                         |       | 800                                                    |       | 724 |   |
| Total costs and operating expenses                                                            |       | 27,350                                                 |       | 20,822 |   |
|                                                                                          |       |                                                   |       |   |   |
| Operating income                                                                              |       | 23,364                                                 |       | 14,794 |   |
|                                                                                          |       |                                                   |       |   |   |
| Interest expense                                                                              |       | (3,776                                                 | )          | (6,030 | ) |
|                                                                                          |       |                                                   |       |   |   |
| Income before income tax expense                                                              |       | 19,588                                                 |       | 8,764 |   |
|                                                                                          |       |                                                   |       |   |   |
| Income tax expense                                                                            |       | (725                                                   | )          | (145 | ) |
|                                                                                          |       |                                                   |       |   |   |
| Net income                                                                                    |       | 18,863                                                 |       | 8,619 |   |
|                                                                                          |       |                                                   |       |   |   |
| Less: General partner’s interest in net income, including incentive  distribution rights |       | (376                                                   | )          | (199 | ) |
|                                                                                          |       |                                                   |       |   |   |
| Limited partners’ interest in net income                                                 |       | $                                                      | 18,487     |   | $ | 8,420 |   |
|                                                                                          |       |                                                   |       |   |   |
| Basic net income per limited partner unit                                                     |       | $                                                      | 1.41       |   | $ | 0.64 |   |
|                                                                                          |       |                                                   |       |   |   |
| Diluted net income per limited partner unit                                                   |       | $                                                      | 1.40       |   | $ | 0.64 |   |
|                                                                                          |       |                                                   |       |   |   |
| Basic weighted average limited partners’ units outstanding                               |       | 13,071                                                 |       | 13,071 |   |
|                                                                                          |       |                                                   |       |   |   |
| Diluted weighted average limited partners’ units outstanding                             |       | 13,203                                                 |       | 13,071 |   |

 

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

* *

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| ** **                                                                         |   | **2009**                               |   | **2008** |   |
| ** **                                                                         |   |                                   |   | * * |   |
| **Cash flows from operating activities**                                           |   |                                   |   |   |   |
| Net income                                                                         |   | $                                      | 18,863 |   | $ | 8,619 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                   |   |   |   |
| Depreciation and  amortization                                                     |   | 3,713                                  |   | 3,492 |   |
| Amortization of deferred  financing fees                                           |   | 289                                    |   | 190 |   |
| Loss on disposition of  property and equipment and other                           |   | —                                 |   | 1 |   |
| Bad debt expense                                                                   |   | 640                                    |   | 30 |   |
| Stock-based compensation  expense                                                  |   | 530                                    |   | 195 |   |
| Changes in operating  assets and liabilities:                                      |   |                                   |   |   |   |
| Accounts receivable                                                                |   | 20,445                                 |   | 68,822 |   |
| Accounts receivable —  affiliate                                              |   | 1,422                                  |   | 1,274 |   |
| Inventories                                                                        |   | 12,494                                 |   | 155,523 |   |
| Broker margin deposits                                                             |   | (4,187                                 | )      | (3,606 | ) |
| Prepaid expenses, all  other current assets and other assets                       |   | (1,966                                 | )      | (5,334 | ) |
| Accounts payable                                                                   |   | (60,179                                | )      | (78,625 | ) |
| Income taxes payable                                                               |   | 71                                     |   | 109 |   |
| Change in fair value of forward fixed price  contracts                             |   | 108,719                                |   | (34,463 | ) |
| Accrued expenses and all  other current liabilities                                |   | 10,376                                 |   | (18,410 | ) |
| Net cash provided by operating activities                                          |   | 111,230                                |   | 97,817 |   |
| ** **                                                                         |   |                                   |   |   |   |
| **Cash flows from investing activities**                                           |   |                                   |   |   |   |
| Capital expenditures                                                               |   | (2,452                                 | )      | (3,195 | ) |
| Proceeds from sale of property and equipment                                       |   | —                                 |   | 9 |   |
| Net cash used in investing activities                                              |   | (2,452                                 | )      | (3,186 | ) |
| ** **                                                                         |   |                                   |   |   |   |
| **Cash flows from financing activities**                                           |   |                                   |   |   |   |
| Payments on credit facilities, net                                                 |   | (100,200                               | )      | (86,600 | ) |
| Payments on note payable, other                                                    |   | —                                 |   | (83 | ) |
| Distributions to partners                                                          |   | (6,534                                 | )      | (6,534 | ) |
| Net cash used in financing activities                                              |   | (106,734                               | )      | (93,217 | ) |
|                                                                               |   |                                   |   |   |   |
| Increase in cash and cash equivalents                                              |   | 2,044                                  |   | 1,414 |   |
| Cash and cash equivalents at beginning of period                                   |   | 945                                    |   | 2,110 |   |
| Cash and cash equivalents at end of period                                         |   | $                                      | 2,989  |   | $ | 3,524 |   |
| ** **                                                                         |   |                                   |   |   |   |
| **Supplemental information**                                                       |   |                                   |   |   |   |
| Cash paid during the  period for interest                                          |   | $                                      | 3,903  |   | $ | 6,237 |   |

* *

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

* *

*3*

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**GLOBALPARTNERS LP**

**CONSOLIDATED STATEMENTS OFPARTNERS’ EQUITY**

**(In thousands)**

**(Unaudited)**

 
| ** **                                    | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **         | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                    | ** ** | ** **      | ** ** | ** **       | ** ** | **General**  | ** ** | **Other**         | ** ** | **Total**          | ** ** |
| ** **                                    | ** ** | **Common**      | ** ** | **Subordinated** | ** ** | **Partner**  | ** ** | **Comprehensive** | ** ** | **Partners’** | ** ** |
| ** **                                    | ** ** | **Unitholders** | ** ** | **Unitholders**  | ** ** | **Interest** | ** ** | **Loss**          | ** ** | **Equity**         | ** ** |
|                                          |       |            |       |             |       |         |       |              |       |               |       |
| **Balance at December 31, 2008**         |       | $               | 163,092    |             | $          | (4,189       | )          | $                 | (172       | )                  | $          | (15,263 | ) | $ | 143,468 |   |
| Stock-based compensation                      |       | 530             |       | —           |       | —       |       | —            |       | 530                |       |
| Distributions to partners                     |       | (3,621          | )          | (2,751           | )          | (162         | )          | —            |       | (6,534             | )          |
| Comprehensive income:                         |       |            |       |             |       |         |       |              |       |               |       |
| Net income                                    |       | 10,485          |       | 8,002            |       | 376          |       | —            |       | 18,863             |       |
| Other comprehensive income:                   |       |            |       |             |       |         |       |              |       |               |       |
| Change in fair value of interest rate collars |       | —          |       | —           |       | —       |       | 1,152             |       | 1,152              |       |
| Change in pension liability                   |       | —          |       | —           |       | —       |       | (242              | )          | (242               | )          |
| Total comprehensive income                    |       | —          |       | —           |       | —       |       | —            |       | 19,773             |       |
| **Balance at March 31, 2009**            |       | $               | 170,486    |             | $          | 1,062        |       | $                 | 42         |               | $          | (14,353 | ) | $ | 157,237 |   |

 

*The accompanyingnotes are an integral part of these*consolidated financial statements.

* *

*4*

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1.**                      Organizationand Basis of Presentation

** **

**Organization**

 

GlobalPartners LP (the “Partnership”) is a publicly traded master limited partnershipthat engages in the wholesale and commercial distribution of refined petroleumproducts and small amounts of natural gas and provides ancillary services tocompanies domestically and, on a limited basis, internationally.

 

ThePartnership has four operating subsidiaries: Global Companies** **LLC, itssubsidiary, Glen Hes Corp., Global Montello Group Corp. and Chelsea Sandwich** **LLC (the four operating subsidiaries, collectively,the “Companies”).  The Companies (otherthan Glen Hes Corp.) are wholly owned by Global Operating** **LLC,a wholly owned subsidiary of the Partnership. In addition, GLP** **FinanceCorp. (“GLP** **Finance”) is a wholly ownedsubsidiary of the Partnership.  GLP** **Finance has no material assets or liabilities.  Its activities will be limited to co-issuingdebt securities and engaging in other activities incidental thereto.

 

ThePartnership’s 1.73% general partner interest is held by Global** **GP** **LLC, thePartnership’s general partner (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 65,824 commonunits and 5,642,424 subordinated units, representing a combined 42.9% limitedpartner interest.

 

**Basis of Presentation**

** **

***InterimFinancial Statements***

** **

**The accompanyingconsolidated financial statements as of March 31, 2009 and December 31, 2008 and for the three months endedMarch 31, 2009 and 2008 reflectthe accounts of the Partnership.  Allintercompany balances and transactions have been eliminated.**

** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) andreflect all adjustments (consisting only of normal recurring adjustments) whichare, in the opinion of management, necessary for a fair presentation of thefinancial 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 financial statements for the year ended December 31, 2008 andnotes thereto contained in the Partnership’s Annual Report on Form 10-K.  The results of operations for the threemonths ended March 31, 2009 arenot necessarily indicative of the results of operations that will be realizedfor the entire year ending December 31, 2009.

 

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

 

ThePartnership’s distillate sales accounted for approximately 63% and 60% of totalsales for the three months ended March 31, 2009 and 2008, respectively.  Gasoline sales accounted for approximately31% and 36% for the three months ended March 31, 2009 and 2008,respectively, and residual oil sales accounted for approximately 6% and 4% forthe three months ended March 31, 2009 and 2008, respectively.

 

ThePartnership had one customer, ExxonMobil Oil Corporation (“ExxonMobil”), whoaccounted for approximately 15% and 19% of total sales for the three monthsended March 31, 2009 and 2008, respectively.

 

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

The consolidated balancesheet at December 31, 2008 has been derived from the audited consolidatedfinancial statements and footnotes thereto included in the Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

**Reclassification**

** **

Certainprior year amounts in the consolidated financial statements have beenreclassified to conform to the current year presentation.

 

**Note 2.**                      Net Income PerLimited Partner Unit

** **

OnJanuary 1, 2009, the Partnership adopted Emerging Issues Task Force (“EITF”)Issue No. 07-04, “Application of the Two-Class Method under FASB Statement No. 128 to MasterLimited Partnerships” (“EITF 07-04”) which specifies the treatmentof earnings per unit calculations when incentive distributions rights (“IDRs”)exist in master limited partnerships. EITF 07-04 providesthat net income for the current period is to be reduced by the amount ofavailable cash that will be distributed with respect to that period forpurposes of calculating net income per unit. Any residual amount representing undistributed net income (or losses) isassumed to be allocated to the ownership interests in accordance with thecontractual provisions of the partnership agreement.

 

Under the Partnership’spartnership agreement, for any quarterly period, the IDRs participate in netincome only to the extent of the amount of cash distributions actuallydeclared, thereby excluding the IDRs from participating in the Partnership’sundistributed net income or losses. Accordingly, the Partnership’s undistributed net income is assumed to beallocated to the common and subordinated unitholders, or limited partners’interest, and to the General Partner’s interest.

 

The following tableprovides a reconciliation of net income and the assumed allocation of netincome to the limited partners’ interest for purposes of computing net income perlimited partner unit for the quarter ending March 31, 2009 (in thousands,except per unit data):

 
| ** **                                                 | ** ** | ** ** | ** ** | **Limited**  | ** ** | **General Partner Interest** | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | **Partner**  | ** ** | **General**                            | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**  | ** ** | **Interest** | ** ** | **Partner**                            | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income                                                 |       | $          | 18,863     |         | $          | 18,487                                 |       | $ | 376 |   | $ | — |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Declared distribution                                      |       | $          | 6,534      |         | $          | 6,372                                  |       | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income             |       | 12,329     |       | 12,115       |       | 214                                    |       | — |   |
| Assumed allocation of net income                           |       | $          | 18,863     |         | $          | 18,487                                 |       | $ | 326 |   | $ | 50 |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| **Denominator:**                                           |       |       |       |         |       |                                   |       |   |   |
| Basic weighted average limited partner units outstanding   |       |       |       | 13,071       |       |                                   |       |   |   |
| Dilutive effect of phantom units                           |       |       |       | 132          |       |                                   |       |   |   |
| Diluted weighted average limited partner units outstanding |       |       |       | 13,203       |       |                                   |       |   |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Basic net income per limited partner unit                  |       |       |       | $            | 1.41       |                                   |       |   |   |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Diluted net income per limited partner unit                |       |       |       | $            | 1.40       |                                   |       |   |   |   |

 

The Partnership appliedthe provisions of EITF No. 07-04 on a retroactive basis which had animmaterial impact on the limited partners’ interest in net income and netincome per limited partner unit for the quarter ended March 31, 2008.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 2.**                      Net Income PerLimited Partner Unit (continued)

** **

The following tableprovides a reconciliation of net income and the assumed allocation of netincome to the limited partners’ interest for purposes of computing net income perlimited partner unit for the quarter ending March 31, 2008 (in thousands,except per unit data):

 
| ** **                                                 | ** ** | ** ** | ** ** | **Limited**  | ** ** | **General Partner Interest** | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | **Partner**  | ** ** | **General**                            | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**  | ** ** | **Interest** | ** ** | **Partner**                            | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income                                                 |       | $          | 8,619      |         | $          | 8,420                                  |       | $ | 199 |   | $ | — |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Declared distribution                                      |       | $          | 6,534      |         | $          | 6,372                                  |       | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income             |       | 2,085      |       | 2,048        |       | 37                                     |       | — |   |
| Assumed allocation of net income                           |       | $          | 8,619      |         | $          | 8,420                                  |       | $ | 149 |   | $ | 50 |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| **Denominator:**                                           |       |       |       |         |       |                                   |       |   |   |
| Basic weighted average limited partner units outstanding   |       |       |       | 13,071       |       |                                   |       |   |   |
| Dilutive effect of phantom units                           |       |       |       | —       |       |                                   |       |   |   |
| Diluted weighted average limited partner units outstanding |       |       |       | 13,071       |       |                                   |       |   |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Basic net income per limited partner unit                  |       |       |       | $            | 0.64       |                                   |       |   |   |   |
|                                                       |       |       |       |         |       |                                   |       |   |   |
| Diluted net income per limited partner unit                |       |       |       | $            | 0.64       |                                   |       |   |   |   |

 

OnApril 22, 2009, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit for the period from January 1,2009 through March 31, 2009.  Thisdeclared cash distribution resulted in an incentive distribution to the GeneralPartner, as the holder of the incentive distribution rights, as indicatedabove, and enabled the Partnership to reach its second target distribution withrespect to such incentive distribution rights. See Note 9, “Cash Distributions” for further information.

 

**Note 3.**                      Comprehensive Income

** **

Thecomponents of comprehensive income consisted of the following (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net income                                    |       | $                                | 18,863     |   | $ | 8,619 |   |
| Change in fair value of interest rate collars |       | 1,152                            |       | (2,396 | ) |
| Change in pension liability                   |       | (242                             | )          | (564 | ) |
| Total comprehensive income                    |       | $                                | 19,773     |   | $ | 5,659 |   |

 

**Note 4.**                      Inventories

** **

ThePartnership hedges substantially all of its inventory purchases through futurescontracts and swap agreements.  Hedgesare executed when inventory is purchased and are identified with that specificinventory.  Changes in the fair value ofthese contracts, as well as the offsetting gain or loss on the hedged inventoryitem, are recognized in earnings as an increase or decrease in cost of sales.  All hedged inventory is valued using thelower of cost, as determined by specific identification, or market.  Prior to sale, hedges are removed fromspecific barrels of inventory, and the then unhedged inventory is sold and accountedfor on a first-in, first-out basis.

 

7

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 4.**                      Inventories(continued)

** **

Inventoriesconsisted of the following (in thousands):

 
| ** **                                                                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Distillates: home heating oil, diesel and kerosene |       | $                        | 147,384    |                        | $          | 160,000 |   |
| Residual oil                                                                     |       | 24,086                   |       | 24,878                      |       |
| Gasoline                                                                         |       | 38,610                   |       | 40,183                      |       |
| Blend stock                                                                      |       | 17,772                   |       | 15,285                      |       |
| Total                                                                            |       | $                        | 227,852    |                        | $          | 240,346 |   |

 

Inaddition to its own inventory, the Partnership has exchange agreements withunrelated third-party suppliers, whereby it may draw inventory from these othersuppliers and suppliers may draw inventory from the Partnership.  Positive exchange balances are accounted foras accounts receivable and amounted to $23.8 million and$14.8 million at March 31, 2009 and December 31, 2008,respectively.  Negative exchange balancesare accounted for as accounts payable and amounted to $13.2 million and$8.4 million at March 31, 2009 and December 31, 2008,respectively.  Exchange transactions arevalued using current quoted market prices.

 

**Note 5.**                      DerivativeFinancial Instruments

** **

**Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended (“SFAS No. 133”)establishes accounting and reporting standards for derivative instruments andhedging activities and requires that an entity recognize derivatives as eitherassets or liabilities on the balance sheet and measure the instruments at fairvalue.  Changes in the fair value of thederivative are to be recognized currently in earnings, unless specific hedgeaccounting criteria are met.**

** **

EffectiveJanuary 1, 2009, the Partnership adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — AnAmendment of FASB Statement No. 133” (“SFAS No. 161”) whichchanges the disclosure requirements for derivative and hedging activities.  SFAS No. 161 requires thePartnership to provide enhanced disclosures about (a) how and why thePartnership uses derivative instruments, (b) how derivative instrumentsand related hedged items are accounted for under SFAS No. 133 and itsrelated interpretations, and (c) how derivative instruments and relatedhedged items affect the Partnership’s financial position, financial performanceand cash flows.

 

**The following tablepresents the volume of activity related to the Partnership’s derivativefinancial instruments at March 31, 2009:**

** **
| ** **            | ** ** | **Units(1)** | ** ** | **Unit of Measure** | ** **            |
|-----------------------|------------|--------------|------------|-------------------------------|-----------------------|
| Oil Contracts         |       |         |       |                          |                  |
| Long                  |       | 11,117       |       | Thousands  of barrels         |                  |
| Short                 |       | 13,713       |       | Thousands  of barrels         |                  |
|                  |       |         |       |                          |                  |
| Natural Gas Contracts |       |         |       |                          |                  |
| Long                  |       | 30,320       |       | Decatherms                    |                  |
| Short                 |       | 30,320       |       | Decatherms                    |                  |
|                  |       |         |       |                          |                  |
| Interest Rate Collars |       | $            | 200,000    |                          | Thousands  of dollars |   |
|                       |            |              |            |                               |                       |  |

** **

----

**(1)**    Number of open positions and gross notional amounts do not quantify riskor represent assets or liabilities of the Partnership, but are used in thecalculation of cash settlements under the contracts.

** **

**8**

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

** **

***Fair Value Hedges***

** **

**The fair value of thePartnership’s derivatives is determined through the use of independent marketsand is based upon the prevailing market prices of such instruments at the dateof valuation.  The Partnership entersinto futures contracts for the receipt or delivery of refined petroleumproducts in future periods.  Thecontracts are entered into in the normal course of business to reduce risk ofloss of inventory on hand, which could result through fluctuations in marketprices.  Changes in the fair value ofthese contracts, as well as the offsetting gain or loss on the hedged inventoryitem, are recognized in earnings as an increase or decrease in cost of sales.  Ineffectiveness related to these hedgingactivities was immaterial at March 31, 2009.**

** **

The Partnership also usesfutures contracts and swap agreements to hedge exposure under forward purchaseand sale commitments.  These agreementsare intended to hedge the cost component of virtually all of the Partnership’sforward purchase and sale commitments. Changes in the fair value of these contracts, as well as offsettinggains or losses on the forward fixed price purchase and sale commitments, arerecognized in earnings as an increase or decrease in cost of sales.  Gains and losses on net product margin fromforward fixed price purchase and sale contracts are reflected in earnings asthese contracts mature.  Ineffectivenessrelated to these hedging activities was immaterial at March 31, 2009.

 

Thefollowing table presents the fair value of the Partnership’s derivative instrumentsand their location in the Partnership’s consolidated balance sheets at March 31,2009 and December 31, 2008 (in thousands):

 
| ** **                                          | ** ** | **Assets**             | ** ** | **Liabilities**     | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                          | ** ** | ** **             | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** | ** ** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **Derivatives Under**                          | ** ** | **Balance Sheet** | ** ** | **2009**            | ** ** | **2008** | ** ** | **Balance Sheet** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **SFAS No. 133**                          | ** ** | **Location**           | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** | **Location** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| *Derivatives designated as hedging instruments*     |       |                   |       |                |       |   |   |   |   |   |   |   |   |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Oil product contracts                               |       | Current assets(1)      |       | $                   | 80,926     |   | $ | 215,237 |   | Current liabilities(2) |   | $ | 37,953 |   | $ | 57,506 |   |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
|                                                |       |                   |       |                |       |   |   | Other long-term |   |   |   |   |   |
| Interest rate collars                               |       |                   |       | —              |       | — |   | liabilities |   | 9,695 |   | 10,847 |   |
|                                                |       |                   |       | $                   | 80,926     |   | $ | 215,237 |   |   |   | $ | 47,648 |   | $ | 68,353 |   |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| *Derivatives not designated as hedging instruments* |       |                   |       |                |       |   |   |   |   |   |   |   |   |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Oil product contracts                               |       | Prepaid expenses and   |       |                |       |   |   | Accrued expenses and |   |   |   |   |   |
|                                                |       | other current assets   |       | 2,817               |       | 6,739 |   | other current liabilities |   | 1,384 |   | 6,799 |   |
|                                                |       |                   |       |                |       |   |   |   |   |   |   |   |   |
| Total derivatives                                   |       |                   |       | $                   | 83,743     |   | $ | 221,976 |   |   |   | $ | 49,032 |   | $ | 75,152 |   |

 

----

(1)          Fair value of forward fixedprice contracts and prepaid expenses and other current assets

(2)          Obligations on forward fixedprice contracts and other derivatives and accrued expenses and other currentliabilities

 

9

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

The following table presents the amount of gains andlosses from derivatives involved in fair value hedging relationships recognizedin the Partnership’s consolidated statements of income for the three monthsended March 31, 2009 and 2008 (in thousands):

 
| ** **                 | ** ** | ** **             | ** ** | **Amount of Gain (Loss)** | ** ** | **Hedged**                 | ** ** | **Location of**   | ** ** | **Amount of Gain (Loss)** | ** ** |
|----------------------------|------------|------------------------|------------|------------------------------------------|------------|----------------------------|------------|------------------------|------------|------------------------------------------|------------|
| **Derivatives in**    | ** ** | **Location of**   | ** ** | **Recognized in Income**       | ** ** | **Items in**          | ** ** | **Gain (Loss)**   | ** ** | **Recognized in Income**       | ** ** |
| **SFAS No. 133** | ** ** | **Gain (Loss)**   | ** ** | **on Derivatives**                  | ** ** | **SFAS No. 133** | ** ** | **Recognized in** | ** ** | **on Hedged Items**            | ** ** |
| **Fair Value**        | ** ** | **Recognized in** | ** ** | **Three Months Ended**         | ** ** | **Fair Value**        | ** ** | **Income on**     | ** ** | **Three Months Ended**         | ** ** |
| **Hedging**                | ** ** | **Income on**     | ** ** | **March 31,**                       | ** ** | **March 31,**         | ** ** | **Hedge**              | ** ** | **Related**                              | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| **Relationship**           | ** ** | **Derivative**         | ** ** | **2009**                                 | ** ** | **2008**                   | ** ** | **Relationships**      | ** ** | **Hedged Item**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                       |       |                   |       |                                     |       |                       |       |                   |       |                                     |       |   |   |   |   |
| Oil product contracts      |       | Cost of sales          |       | $                                        | (100,224   | )                          | $          | 2,532                  |       | Inventories                              |       | Cost of sales |   | $ | 100,580 |   | $ | (2,522 | ) |
|                            |            |                        |            |                                          |            |                            |            |                        |            |                                          |            |  |  |  |  |  |  |  |  |

 

ThePartnership’s derivative financial instruments do not containcredit-risk-related or other contingent features that could cause acceleratedpayments when these financial instruments are in net liability positions.

 

Thecomposition and fair value of derivative instruments relating to forward fixedprice purchase and sale contracts on the Partnership’s consolidated balancesheet consisted of the following (in thousands):

 
| ** **           | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------|------------|--------------------------|------------|-----------------------------|------------|
| Futures contracts    |       | $                        | 40,862     |                        | $          | 138,741 |   |
| Swaps and other, net |       | 4,253                    |       | 15,092                      |       |
| Total                |       | $                        | 45,115     |                        | $          | 153,833 |   |

 

The total balances of$45.1 million and $153.8 million reflect the fair value of theforward fixed price contract asset net of the corresponding liability on theaccompanying consolidated balance sheets at March 31, 2009 and December 31,2008, respectively.

 

The Partnership alsomarkets and sells natural gas.  ThePartnership generally conducts business by entering into forward purchasecommitments for natural gas only when it simultaneously enters into arrangementsfor the sale of product for physical delivery to third-party users.  The Partnership generally takes deliveryunder its purchase commitments at the same location as it delivers tothird-party users.  Through thesetransactions, which establish an immediate margin, the Partnership seeks tomaintain 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 in earnings as an increase or decrease in cost of sales.

 

ThePartnership formally documents all relationships between hedging instrumentsand hedged items after its risk management objectives and strategy forundertaking the hedge are determined. The Partnership calculates 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.

 

ThePartnership has a daily margin requirement with its broker based on the priorday’s market results on open futures contracts. The required brokerage margin balance was $13.2 million and$9.0 million at March 31, 2009 and December 31, 2008,respectively.

 

10

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

ThePartnership is exposed to credit loss in the event of nonperformance bycounterparties of forward purchase and sale commitments, futures contracts,options and swap agreements, but the Partnership has no current reason toexpect any material nonperformance by any of these counterparties.  Futures contracts, the primary derivativeinstrument utilized by the Partnership, are traded on regulated exchanges,greatly reducing potential credit risks. The Partnership utilizes primarily one clearing broker, a majorfinancial institution, for all New YorkMercantile Exchange****(“NYMEX”)derivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is presented on a net basis on the consolidated balancesheets.  Exposure on forward purchase andsale commitments, swap and certain option agreements is limited to the amountof the recorded fair value as of the balance sheet dates.

 

***Cash Flow Hedges***

 

The Partnership links all hedgesthat are designated as cash flow hedges to forecasted transactions.  To the extent such hedgesare effective, the changes in the fair value of the derivative instrument isreported as a component of other comprehensive income and reclassified intoearnings in the same period during which the hedged transaction affects earnings.

 

The Partnership executed two zeropremium interest rate collars with major financial institutions.  Each collar is designated as a cash flowhedge and accounted for under the provisions of SFAS No. 133.  The first collar, which became effective on May 14,2007 and expires on May 14, 2011, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. Under the first collar, the Partnership capped its exposure at a maximumthree-month LIBOR rate of 5.75% and established a minimum floor rate of3.75%.  As of March 31, 2009, thethree-month LIBOR rate of 1.23% was lower than the floor rate.  As a result, in April 2009, thePartnership will remit to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$300,500 and was recorded in accrued expenses and other current liabilities onthe accompanying consolidated balance sheet. As of March 31, 2009, the fair value of the first collar was a liabilityof approximately $5.0 millionand was recorded in both other long-term liabilities and accumulated othercomprehensive income.  Hedgeeffectiveness was assessed at inception and is assessed quarterly,prospectively and retrospectively.  The changes inthe fair value of the first collar are expected to be highly effective inoffsetting the changes in interest rate payments attributable to fluctuationsin the three-month LIBOR rate above and below the first collar’s strikerates.  Ineffectivenessrelated to the first collar was immaterial at March 31, 2009.

 

On September 29, 2008, thePartnership executed its second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthlyinterest payments made on the Partnership’s $100.0 million one-month LIBOR-based borrowings (and subsequentrefinancings thereof) due to changes in the one-month LIBOR rate.  Under the second collar, the Partnershipcapped its exposure at a maximum one-month LIBOR rate of 5.50% and establisheda minimum floor rate of 2.70%.  As of March 31, 2009, theone-month LIBOR rate of 0.50% was lower than the floor rate.  As a result, in April 2009, thePartnership will remit to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$184,000 and was recorded in accrued expenses and other current liabilities onthe accompanying consolidated balance sheet. As of March 31, 2009,the fair value of the second collar was a liability of approximately $4.7 million and was recorded in both other long-termliabilities and accumulated other comprehensive income in the accompanyingconsolidated balance sheet.  Hedgeeffectiveness was assessed at inception and is assessed quarterly,prospectively and retrospectively, using the regression analysis.  The changes in the fair value of the secondcollar are expected to be highly effective in offsetting the changes ininterest rate payments attributable to fluctuations in the one-month LIBOR rateabove and below the second collar’s strike rates.  Ineffectivenessrelated to the second collar was immaterial at March 31, 2009.

 

11

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 5.**                      Derivative FinancialInstruments (continued)

** **

Thefollowing table presents the amount of gains and losses from derivativesinvolved in cash flow hedging relationships recognized in the Partnership’sconsolidated statements of income for the three months ended March 31,2009 and 2008 (in thousands):

 
| ** **               | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | **Recognized in Income** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|--------------------------|------------|
| ** **               | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | **on Derivatives**       | ** ** |
| ** **               | ** ** | **Amount of Gain (Loss)**                    | ** ** | **(Ineffectiveness Portion**                | ** ** |
| ** **               | ** ** | **Recognized in Other Comprehensive Income** | ** ** | **and Amount Excluded  from Effectiveness** | ** ** |
| **Derivatives in**       | ** ** | **on Derivatives**                           | ** ** | **Testing**                                 | ** ** |
| **SFAS No. 133**    | ** ** | **Three Months Ended**                       | ** ** | **Three Months Ended**                      | ** ** |
| **Cash Flow**            | ** ** | **March 31,**                           | ** ** | **March 31,**                          | ** ** | **March 31,**       | ** ** | **March 31,** | ** ** |
| **Hedging Relationship** | ** ** | **2009**                                     | ** ** | **2008**                                    | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                     |       |                                         |       |                                        |       |                     |       |   |   |
| Interest rate collars    |       | $                                            | 1,152      |                                        | $          | (2,396                   | )          | $ | — |   | $ | — |   |
|                          |            |                                              |            |                                             |            |                          |            |  |  |  |  |  |  |

 

Ineffectiveness related tothe interest rate collars was immaterial at March 31, 2009.

 

***Hedges Not Involved in a SFAS No. 133Relationship***

 

Whilethe Partnership seeks to maintain a position that is substantially balancedwithin its product purchase activities, it may experience net unbalancedpositions for short periods of time as a result of variances in daily sales andtransportation and delivery schedules as well as logistical issues associatedwith inclement weather conditions.  Inconnection with managing these positions and maintaining a constant presence inthe marketplace, both necessary for its business, the Partnership engages in acontrolled trading program for up to an aggregate of 250,000 barrels of refinedpetroleum products at any one point in time.

 

Thefollowing table presents the amount of gains and losses from derivatives notinvolved in a SFAS No. 133 hedging relationships recognized in thePartnership’s consolidated statements of income for the three months ended March 31,2009 and 2008 (in thousands):

 
| ** **                                | ** ** | ** **        | ** ** | **Amount of Gain (Loss)** | ** ** |
|-------------------------------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Location of**   | ** ** | **Recognized in Income**  | ** ** |
| ** **                                | ** ** | **Gain (Loss)**   | ** ** | **on Derivatives**        | ** ** |
| ** **                                | ** ** | **Recognized in** | ** ** | **Three Months Ended**    | ** ** |
| **Derivatives Not Designated as Hedging** | ** ** | **Income on**     | ** ** | **March 31,**        | ** ** | **March 31,** | ** ** |
| **Instruments Under SFAS No. 133**   | ** ** | **Derivatives**   | ** ** | **2009**                  | ** ** | **2008** | ** ** |
|                                      |       |              |       |                      |       |   |   |
| Oil product contracts                     |       | Cost  of sales    |       | $                         | 3,985      |   | $ | 5,555 |   |
|                                           |            |                   |            |                           |            |  |  |  |  |

 

**Note 6.**                      Debt

** **

ThePartnership has a senior secured credit agreement (the “Credit Agreement”) withtotal available commitments of $750.0** **million.  There are three facilities under the CreditAgreement:

 

·                  aworking capital revolving credit facility to be used for working capitalpurposes and letters of credit in the principal amount equal to the lesser ofthe Partnership’s borrowing base and $650.0 million; the $650.0 millionincludes two $50.0 million seasonal overline facilities that are availableeach year only during the period between September 1 and June 30;

 

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

 

·                  a $15.0 millionrevolving credit facility to be used for general purposes, including payment ofdistributions to the Partnership’s unitholders.

 

12

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 6.**                      Debt(continued)

** **

Inaddition, the Credit Agreement has an accordion feature whereby the Partnershipmay request on the same terms and conditions of its then existing CreditAgreement, provided no Event of Default (as defined in the Credit Agreement) thenexists, an increase to:  (1) theacquisition facility by up to another $50.0 million, for a totalacquisition facility of up to $135.0 million; and (2) the workingcapital revolving credit facility by up to another $200.0 million, for atotal working capital revolving credit facility of up to $850.0 million.  Any such request for an increase by thePartnership must be in a minimum amount of $5.0 million, and no more thanthree such requests may be made for each facility.  The Partnership, however, cannot provideassurance that its lending group will agree to fund any request by thePartnership for additional amounts in excess of the total available commitmentsof $750.0** **million.

 

Availabilityunder the Partnership’s working capital revolving credit facility is subject toa borrowing base which is redetermined from time to time and based on specificadvance rates on eligible current assets. Under the Credit Agreement, the Partnership can borrow only up to thelevel of its then current borrowing base. Availability under the Partnership’s borrowing base may be affected byevents beyond the Partnership’s control, such as changes in refined petroleumproduct prices, collection cycles, counterparty performance, advance rates andlimits and deteriorating economic conditions. These and other events could require the Partnership to seek waivers oramendments of covenants or alternative sources of financing or to reduceexpenditures.  The Partnership canprovide no assurance that such waivers, amendments or alternative financingcould be obtained or, if obtained, would be on terms acceptable to thePartnership.

 

Duringthe period from January 1, 2008 through July 20, 2008,borrowings under the Partnership’s working capital revolving credit,acquisition and revolving credit facilities bore interest at the Partnership’soption at (1) the Eurodollar rate, plus 1%, 11⁄2% and 11⁄2%, respectively, (2) thecost of funds rate, plus 1%, 13⁄4% and 11⁄2%, respectively, or (3) the bank’sbase rate.

 

Commencing July 21, 2008, borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe Credit Agreement, as amended, which in turn depends upon the CombinedInterest Coverage Ratio (as such term is defined in the Credit Agreement).  Commencing July 21, 2008, borrowings under the acquisition andrevolving credit facilities bear interest at (1) the Eurodollar rate plus2.25% to 2.75%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe Credit Agreement, as amended, which in turn depends upon the CombinedInterest Coverage Ratio.  The averageinterest rates for the three months ended March 31, 2009 and 2008 wereapproximately 3.9% and 4.6%, respectively.

 

In addition, the Partnershipexecuted two zero premium interest rate collars with major financialinstitutions.  The first collar, whichbecame effective on May 14, 2007, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. The second collar, which became effective on October 2, 2008, isused to hedge the variability in cash flows in monthly interest payments madeon the Partnership’s $100.0 millionone-month LIBOR-based borrowings (and subsequent refinancings thereof) due tochanges in the one-month LIBOR rate (see Note 5 for further discussion on the interest rate collars).

 

ThePartnership incurs a letter of credit fee of 2% per annum for each letter ofcredit issued.  In addition, thePartnership incurs a commitment fee on the unused portion of the threefacilities under the Credit Agreement (including the unused portion of eitherof the seasonal overline facilities exercised by the Partnership) equal to 0.3%to 0.375% per annum, depending on the pricing level and the Combined InterestCoverage Ratio provided in the Credit Agreement.  The Partnership also incurs a facility fee of0.1% per annum on any unexercised seasonal overline facility during the periodbetween September 1 and June 30 and a seasonal overline fee of$30,000 each time the Partnership elects to exercise either of the seasonaloverline facilities.

 

13

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**Table of Contents**

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 6.       Debt (continued)**

 

TheCredit Agreement will mature on April 22, 2011.  The Partnership classifies a portion of itsworking capital revolving credit facility as a long-term liability because thePartnership has a multi-year, long-term commitment from its bank group.  The long-term portion of the working capitalrevolving credit facility was $183.9 million and $154.1 million at March 31,2009 and December 31, 2008, respectively, representing the amountsexpected to be outstanding during the year. In addition, the Partnership classifies a portion of its working capitalrevolving credit facility as a current liability because it repays amountsoutstanding and reborrows funds based on its working capital requirements.  The current portion of the working capitalrevolving credit facility was approximately $78.2 million and$208.2 million at March 31, 2009 and December 31, 2008,respectively, representing the amounts the Partnership expects to pay downduring the course of the year.

 

Asof March 31, 2009, the Partnership had total borrowings outstanding underthe Credit Agreement of $333.3 million, including $71.2 millionoutstanding on the acquisition facility. In addition, the Partnership had outstanding letters of credit of$61.0 million.  The total remainingavailability for borrowings and letters of credit at March 31, 2009 and December 31,2008 was $355.7 million and $211.3 million, respectively.

 

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

 

TheCredit Agreement imposes financial covenants that require the Partnership tomaintain certain minimum working capital amounts, capital expenditure limits, aminimum EBITDA ratio, a minimum combined interest coverage ratio and a maximumleverage ratio.  The Partnership was incompliance with the foregoing covenants at March 31, 2009.  The Credit Agreement also contains arepresentation whereby there can be no event or circumstance, eitherindividually or in the aggregate, that has had or could reasonably be expectedto have a Material Adverse Effect (as defined in the Credit Agreement).

 

TheCredit Agreement also requires that in each calendar year, the outstandingamount under the working capital revolving credit facility must be equal to orless than $263.0 million for a period of ten consecutive calendardays.  The Partnership has complied withthis provision for the year ending December 31, 2009.

 

TheCredit Agreement limits distributions by the Partnership to its unitholders tothe amount of the Partnership’s available cash and permits borrowings to fundsuch distributions only under the $15.0 million revolving creditfacility.  The revolving credit facilityis subject to an annual “clean-down” period, requiring the Partnership toreduce the amount outstanding under the revolving credit facility to $0 for 30consecutive calendar days in each calendar year.  The Partnership has complied with thisprovision for the year ending December 31, 2009.

 

Thelending group under the Credit Agreement includes the followinginstitutions:  Bank of America, N.A.;Standard Chartered Bank; JPMorgan Chase Bank, N.A.; Societe Generale; RBSCitizens, National Association; Sovereign Bank; Fortis Capital Corp.; WebsterBank National Association; KeyBank National Association; TD Bank, N.A.(f/k/a TD BankNorth, N.A.); Wells Fargo Bank, N.A.; Wachovia Bank, NationalAssociation; and Calyon New York Branch.

 

14

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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

 

| ** **                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **March 31,**     | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Service cost                   |       | $                      | 325        |   | $ | 265 |   |
| Interest cost                  |       | 229                    |       | 200 |   |
| Expected return on plan assets |       | (161                   | )          | (165 | ) |
| Recognized net actuarial loss  |       | 48                     |       | — |   |
| Net periodic benefit cost      |       | $                      | 441        |   | $ | 300 |   |

 

**Note 8.**                      Related PartyTransactions

** **

ThePartnership is a party to a Second Amended and Restated Terminal Storage Rentaland Throughput Agreement with Global Petroleum Corp. (“GPC”), an affiliate ofthe Partnership, which extends through December 2013 with annual renewaloptions thereafter.  The agreement isaccounted for as an operating lease.  Theexpenses under this agreement totaled approximately $2.1** **millionfor each of the three months ended March 31,****2009and 2008.

 

Pursuantto an Amended and Restated Services Agreement with GPC, GPC provides certainterminal operating management services to the Partnership and uses certainadministrative, accounting and information processing services of thePartnership.  The expenses from theseservices totaled approximately $21,500 for each of the three months ended March 31,2009 and 2008.  These charges wererecorded in selling, general and administrative expenses in the accompanyingconsolidated statements of income.  Theagreement is for an indefinite term, and either party may terminate its receiptof some or all of the services thereunder upon 180 days’ notice at any timeafter January 1, 2009.

 

Pursuantto the Partnership’s Amended and Restated Services Agreement with AllianceEnergy LLC (formerly known as Alliance Energy Corp.) (“Alliance”), thePartnership also provides certain administrative, accounting and informationprocessing services, and the use of certain facilities, to Alliance, anaffiliate of the Partnership that is wholly owned by AE Holdings Corp.,which is approximately 95% owned by members of the Slifka family.  The income from these services wasapproximately $212,000 and $216,500 for the three months ended March 31,2009 and 2008, respectively.  These feeswere recorded as an offset to selling, general and administrative expenses inthe accompanying consolidated statements of income.  The agreement extends through January 1,2010.

 

ThePartnership sells refined petroleum products to Alliance at prevailing marketprices at the time of delivery.  Sales toAlliance were approximately $2.7 million and $5.8 million for thethree months ended March 31, 2009 and 2008, respectively.

 

TheGeneral Partner employs substantially all of the Partnership’s employees andcharges the Partnership for their services. The expenses for the three months ended March 31, 2009 and 2008,including payroll, payroll taxes and bonus accruals, were $12.3 millionand $7.7 million, respectively.  ThePartnership also reimburses the General Partner for its contributions under theGeneral Partner’s 401(k) Savings and Profit Sharing Plan and the GeneralPartner’s qualified and non-qualified pension plans.

 

15

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 8.**                     Related Party Transactions(continued)

** **

The table below presents trade receivables with Alliance, receivablesincurred in connection with the services agreements between Alliance and thePartnership and GPC and the Partnership, as the case may be, and receivablesfrom the General Partner (in thousands):

 

| ** **                               | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Receivables from Alliance                |       | $                        | 472        |                        | $          | 383 |   |
| Receivables from GPC                     |       | 255                      |       | 325                         |       |
| Receivables from the General Partner (1) |       | 369                      |       | 1,810                       |       |
| Total                                    |       | $                        | 1,096      |                        | $          | 2,518 |   |

 

----

(1)          Receivables from the GeneralPartner reflect the Partnership’s prepayment of payroll taxes and payroll accrualsto the General Partner.

 

**Note 9.**                     Cash Distributions

** **

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

 

Within45 days after the end of each quarter, the Partnership will distribute all ofits available 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.

 

ThePartnership will make distributions of available cash from operating surplusfor any quarter during the subordination period as defined in its partnershipagreement in the following manner: firstly, 98.27% to the common unitholders,pro rata, and 1.73% to the General Partner, until the Partnership distributesfor each outstanding common unit an amount equal to the minimum quarterlydistribution for that quarter; secondly, 98.27% to the common unitholders, prorata, and 1.73% to the General Partner, until the Partnership distributes foreach outstanding common unit an amount equal to any arrearages in payment ofthe minimum quarterly distribution on the common units for any prior quartersduring the subordination period; thirdly, 98.27% to the subordinatedunitholders, pro rata, and 1.73% to the General Partner, until the Partnershipdistributes for each subordinated unit an amount equal to the minimum quarterlydistribution for that quarter; and thereafter, cash in excess of the minimumquarterly distributions is distributed to the unitholders and the GeneralPartner, as the holder of the incentive distribution rights, based on thepercentages as provided below.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 9.**                      Cash Distributions(continued)

** **

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

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

 

ThePartnership paid the following cash distribution during 2009 (in thousands,except per unit data):

 
| **Cash  Distribution  Payment Date** | ** ** | **Per Unit  Cash  Distribution** | ** ** | **Common  Units** | ** ** | **Subordinated  Units** | ** ** | **General  Partner** | ** ** | **Incentive Distribution** | ** ** | **Total Cash  Distribution** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------|------------|-------------------------|------------|----------------------|------------|----------------------------|------------|-----------------------------------|------------|
|                                      |       |                                  |       |              |       |                    |       |                 |       |                       |       |                              |       |
| 02/13/09(1)                               |       | $                                     | 0.4875     |              | $          | 3,621                   |       | $                    | 2,751      |                       | $          | 112                               |       | $ | 50 |   | $ | 6,534 |   |
|                                           |            |                                       |            |                   |            |                         |            |                      |            |                            |            |                                   |            |  |  |  |  |  |  |

 

----

(1)          This distribution of $0.4875per unit resulted in the Partnership reaching its second target distributionfor the fourth quarter of 2008.  As aresult, the General Partner received this additional incentive distribution

 

OnApril 22, 2009, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit for the period from January 1,2009 through March 31, 2009 ($1.95 per unit on an annualized basis).  On May 15, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business May 7, 2009.  Thisdistribution will result in the Partnership reaching its second targetdistribution for the quarter ended March 31, 2009.

 

**Note 10.**               Segment Reporting

** **

ThePartnership is a wholesale and commercial distributor of gasoline, distillatesand residual oil 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 yearended December 31, 2008.

 

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

 

TheCommercial segment includes (1) sales and deliveries of unbrandedgasoline, home heating oil, diesel, kerosene, residual oil and small amounts ofnatural gas to customers in the public sector and to large commercial andindustrial customers, either through a competitive bidding process or throughcontracts of various terms, and (2) sales of custom blended distillatesand residual oil delivered by barges or from a terminal dock.  Commercial segment customers include federaland state agencies, municipalities, large industrial companies, many autonomousauthorities such as transportation authorities and water resource authorities,colleges and universities and a limited group of small utilities.  Unlike the Wholesale segment, in theCommercial segment, the Partnership generally arranges the delivery of theproduct to the customer’s designated location, typically hiring third-partycommon carriers to deliver the product.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 10.**              Segment Reporting(continued)

** **

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

 

Summarizedfinancial information for the Partnership’s reportable segments is presented inthe table below (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **March 31,**     | ** ** |
| ** **                                 | ** ** | **2009**               |       | **2008** |   |
| **Wholesale Segment:**                     |       |                   |       |   |   |
| Sales                                      |       |                   |       |   |   |
| Distillates                                |       | $                      | 1,006,616  |   | $ | 1,603,410 |   |
| Gasoline                                   |       | 501,659                |       | 975,068 |   |
| Residual oil                               |       | 11,490                 |       | 18,357 |   |
| Total                                      |       | $                      | 1,519,765  |   | $ | 2,596,835 |   |
| Net product margin (1)                     |       |                   |       |   |   |
| Distillates                                |       | $                      | 33,853     |   | $ | 23,092 |   |
| Gasoline                                   |       | 11,786                 |       | 8,544 |   |
| Residual oil                               |       | 2,820                  |       | 3,896 |   |
| Total                                      |       | $                      | 48,459     |   | $ | 35,532 |   |
| **Commercial Segment:**                    |       |                   |       |   |   |
| Sales                                      |       | $                      | 113,190    |   | $ | 124,157 |   |
| Net product margin (1)                     |       | $                      | 4,928      |   | $ | 2,606 |   |
| **Combined sales and net product margin:** |       |                   |       |   |   |
| Sales                                      |       | $                      | 1,632,955  |   | $ | 2,720,992 |   |
| Net product margin (1)                     |       | $                      | 53,387     |   | $ | 38,138 |   |
| Depreciation allocated to cost of sales    |       | 2,673                  |       | 2,522 |   |
| **Combined gross profit**                  |       | $                      | 50,714     |   | $ | 35,616 |   |

 

----

(1)            Net productmargin is a non-GAAP financial measure used by management and external users ofthe Partnership’s consolidated financial statements to assess the Partnership’sbusiness.  The table above reconciles netproduct margin on a combined basis to gross profit, a directly comparable GAAPmeasure.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 10.**              Segment Reporting(continued)

** **

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

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **March 31,**     | ** ** |
| ** **                                                              | ** ** | **2009**               |       | **2008** |   |
| **Combined gross profit**                                               |       | $                      | 50,714     |   | $ | 35,616 |   |
| **Operating costs and expenses not allocated to  reportable segments:** |       |                   |       |   |   |
| Selling, general and administrative expenses                            |       | 18,075                 |       | 11,073 |   |
| Operating expenses                                                      |       | 8,475                  |       | 9,025 |   |
| Amortization expenses                                                   |       | 800                    |       | 724 |   |
| **Total operating costs and expenses**                                  |       | 27,350                 |       | 20,822 |   |
| Operating income                                                        |       | 23,364                 |       | 14,794 |   |
| Interest expense                                                        |       | (3,776                 | )          | (6,030 | ) |
| Income tax expense                                                      |       | (725                   | )          | (145 | ) |
| **Net income**                                                          |       | $                      | 18,863     |   | $ | 8,619 |   |

 

Therewere no foreign sales for the three months ended March 31, 2009 and2008.  The Partnership has no foreignassets.

 

**Note 11.**              Environmental Liabilities

** **

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

 

The Partnership maintains insurance of various typeswith varying levels of coverage that it considers adequate under thecircumstances to cover its operations and properties.  The insurance policies are subject todeductibles that the Partnership considers reasonable and not excessive.  In addition, the Partnership has entered intoindemnification agreements with various sellers in conjunction with several ofits acquisitions.  Allocation ofenvironmental liability is an issue negotiated in connection with each of thePartnership’s acquisition transactions. In each case, the Partnership makes an assessment of potentialenvironmental liability exposure based on available information.  Based on that assessment and relevanteconomic and risk factors, the Partnership determines whether to, and theextent to which it will, assume liability for existing environmentalconditions.

 

In connection with the November 2007 acquisition of ExxonMobil’sGlenwood Landing and Inwood, New York terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations underremedial action plans submitted by ExxonMobil to and approved by the New YorkDepartment of Environmental Conservation (“NYDEC”) with respect to bothterminals.  As a result, the Partnershiprecorded, on an undiscounted basis, total environmental liabilities ofapproximately $1.2 million, of which approximately $0.6 million waspaid by the Partnership for the year ended December 31, 2008.  The remaining liability of $0.6 millionwas recorded as a current liability of $0.4 million and a long-term liabilityof $0.2 million on the accompanying consolidated balance sheet at March 31,2009.  The remedial action planssubmitted by ExxonMobil have been implemented by GlobalCompanies LLC.  The Partnership doesnot believe that compliance with the terms thereof will result in materialcosts in excess of the environmental reserve or have a material impact on itsoperations.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 11.**               Environmental Liabilities

** **

Inconnection with the May 2007 acquisition of ExxonMobil’s Albany andNewburgh, New York and Burlington, Vermont terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations undera proposed remedial action plan submitted by ExxonMobil to NYDEC with respectto the Albany, New York terminal. As a result, the Partnership recorded, on anundiscounted basis, total environmental liabilities of approximately $8.0** **million, of which approximately $0.1 million waspaid for the year ended December 31, 2008 for a balance of$7.9 million.  In June 2008,the Partnership submitted a remedial action work plan to NYDEC, implementingNYDEC’s conditional approval of the remedial action plan submitted byExxonMobil.  Although NYDEC has not yetofficially approved the remedial action work plan submitted by the Partnership,the Partnership has responded to NYDEC’s requests for additional informationand conducted pilot tests for the remediation outlined in the work plan.  Based on the results of such pilot tests, thePartnership changed its estimate and reduced the environmental liability by$2.8** **million.  In connection with the foregoing, thePartnership paid approximately $15,000 for the three months ended March 31,2009.  The remaining liability of$5.0 million was recorded as a current liability of $2.9 million anda long-term liability of $2.1 million on the accompanying consolidatedbalance sheet at March 31, 2009. Subject to NYDEC’s approval of the proposed remedial action work plan,the Partnership does not believe that compliance with the terms thereof willresult in material costs in excess of the environmental reserve or have amaterial impact on its operations.

 

GlobalCompanies LLC, in addition to several affiliates, has been named as one ofover 50 defendants in two lawsuits alleging methyl tertiary-butyl ether (“MTBE”)contamination of groundwater in Massachusetts. MTBE is an oxygenate that has been used extensively to reduce motorvehicle tailpipe emissions.  In the casesof Town of Duxbury, et al. v. Amerada Hess Corp., et al., filed December 31,2003, and City of Lowell v. Amerada Hess Corp., et al., filed December 30,2004, plaintiffs allege that manufacturers, refiners and others involved in thedistribution of gasoline containing MTBE are liable for the costs ofinvestigating possible MTBE groundwater contamination, treating suchcontaminated groundwater where found, and related relief including trebledamages and injunctive relief.  Theplaintiffs in these cases generally claim to be public water providers ormunicipal or other government authorities. These cases have been consolidated in multi-district litigation withover 60 other MTBE cases in federal court in the Southern District of NewYork.  The Partnership entered into anagreement, in principle, to settle these cases and, as a result, the Partnershiprecorded $0.9 million as a current environmental liability on theaccompanying consolidated balance sheet at March 31, 2009.  The Partnership does not believe thatsettlement of these cases will have a material impact on its operations.

 

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

 

**Note 12.**               Long-Term Incentive Plan

** **

InOctober 2005, the General Partner adopted a Long-Term Incentive Plan (“LTIP”)whereby 564,242 common units were authorized for issuance.  Any units delivered pursuant to an awardunder the LTIP may be acquired in the open market or from any affiliate, benewly issued units or any combination of the foregoing.  The LTIP provides for awards to employees,consultants and directors of the General Partner and employees and consultantsof affiliates of the Partnership who perform services for the Partnership.  The LTIP allows for the award of unitoptions, unit appreciation rights, restricted units, phantom units anddistribution equivalent rights (“DERs”).

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 12.**               Long-Term Incentive Plan(continued)

** **

*Long-Term Incentive Plan*

 

OnAugust 14, 2007, the Compensation Committee of the board of directors ofthe General Partner granted awards of phantom units and associated DERs underthe LTIP to certain employees and non-employee directors of the GeneralPartner.  The phantom units granted willcliff vest on December 31, 2009 and become payable on a one-for-one basisin common units of the Partnership (or cash equivalent) upon the achievement ofcertain performance goals over the vesting period.  The DERs that were granted in tandem with thephantom units will vest and become payable in cash simultaneously with thevesting of the phantom units.  Anyphantom units and associated DERs that have not vested as of the end of thecliff vesting period will be forfeited. The Partnership currently intends and reasonably expects to issue anddeliver the common units upon vesting.

 

SFASNo. 123(R), “Share-Based Payment,” requires that a non-vested equity shareunit awarded to an employee is to be measured at its fair value as if it werevested and issued on the grant date.  Thefair value of the Partnership’s award at the August 14, 2007 grant dateapproximated the fair value of the Partnership’s common unit at that date.

 

SFASNo. 123(R) requires compensation cost for an award of share-basedemployee compensation classified as equity, as is the case of the Partnership’saward, to be recognized over the requisite service period.  The requisite service period for this award isfrom August 14, 2007, the grant date, through December 31, 2009, thevesting date.  The Partnership willrecognize as compensation expense the value of the portion of the award that isultimately expected to vest over the Requisite Service Period on astraight-line basis.  In accordance withSFAS No. 123(R), the Partnership estimated forfeitures at the time ofgrant.  Such estimates, which were basedon the Partnership’s service and performance history, are revised, ifnecessary, in subsequent periods if actual forfeitures differ from estimates.

 

Withrespect to these awards, the Partnership recorded compensation expenses ofapproximately $0.2 million for each of the three months ended March 31,2009 and 2008, which are included in selling, general and administrativeexpenses in the accompanying consolidated statements of income.  The total compensation cost related to thenon-vested awards not yet recognized at March 31, 2009 is approximately$0.6 million and is expected to be recognized ratably over the remainingRequisite Service Period.

 

*Three-Year Phantom Units*

 

OnDecember 31, 2008, the Compensation Committee of the board of directors ofthe General Partner granted 99,700 phantom units to a named executiveofficer, including a contingent right to receive an amount in cash equal to thenumber of phantom units multiplied by the cash distribution per common unitmade by the Partnership from time to time during the period the phantom unitsare outstanding.  The phantom units,which are subject to graded vesting, will vest in six equal installments on June 30and December 31 of each year commencing June 30, 2009.  Compensation expense related to these phantomunits is recognized using the accelerated attribution method.  The Partnership recorded compensation expenserelated to this phantom unit award of approximately $0.2 million for thethree months ended March 31, 2009, which is included in selling, generaland administrative expenses in the accompanying consolidated statement ofincome.  The total compensation costrelated to the non-vested awards not yet recognized at March 31, 2009 isapproximately $0.9 million and is expected to be recognized over theremaining three-year requisite service period.

 

*Five-Year Phantom Units*

 

OnFebruary 5, 2009, the Compensation Committee of the board of directors ofthe General Partner granted awards of 277,777 phantom units under the LTIP tocertain employees of the General Partner. The phantom units will vest and become payable on a one-for-one basis incommon units of the Partnership (and/or cash in lieu thereof) on December 31,2013 (or potentially sooner as described below), subject in each case tocontinued employment of the respective employee and subject to a performancegoal for the phantom units granted to one of the recipients.  Any phantom units that have not vested as ofthe end of the five year cliff vesting period will be forfeited.

 

21

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 12.**               Long-Term Incentive Plan(continued)

** **

Allor a portion of the phantom units granted to the employees may vest earlierthan December 31, 2013 if the Average Unit Price (as defined below) equalsor exceeds specified target prices during specified periods.  Specifically, if the Average Unit Priceequals or exceeds: (i) $21.00 at any time prior to December 31, 2013,then 25% of the phantom units will automatically vest; (ii) $27.00 at anytime during the period from February 5, 2011 through December 31,2013, then an additional 25% of the phantom units will automatically vest; and (iii) $34.00at any time during the period from June 5, 2012 through December 31,2013, then all of the remaining phantom units will automatically vest. “AverageUnit Price” means the average closing price of the Partnership’s common unitfor any 10-consecutive trading day period.

 

Thefair value of the Partnership’s award at the February 5, 2009 grant dateapproximated the fair value of the Partnership’s common unit at that date,reduced by the present value of the distributions stream on the equivalentnumber of common units over the derived service period.  Compensation cost is recognized ratably overthe derived service period which was determined for each tranche using theMonte Carlo simulation model.  ThePartnership recorded compensation expense related to this phantom units awardof approximately $0.1 million for the three months ended March 31,2009, which is included in selling, general and administrative expenses in theaccompanying consolidated statement of income. The total compensation cost related to the non-vested awards not yetrecognized at March 31, 2009 is approximately $0.9 million and isexpected to be recognized ratably over the remaining derived service periods.

 

*Status of Non-Vested Units*

 

Thefollowing table presents a summary of the status of the non-vested units as of March 31,2009:

 

| ** **                                           | ** ** | **Number of  Non-vested  Units** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| Outstanding non-vested units at January 1, 2009 |       | 162,320                          |       | $                                             | 18.13      |   |
| Granted                                              |       | 277,777                          |       | 3.73                                          |       |
| Vested                                               |       | —                           |       | —                                        |       |
| Forfeited                                            |       | —                           |       | —                                        |       |
| Outstanding non-vested units at March 31, 2009  |       | 440,097                          |       | $                                             | 9.04       |   |

 

**Note 13.**               Fair Value Measurements

** **

SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”) defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants at the measurement date.

 

SFAS No. 157 establishesa fair value hierarchy, which prioritizes the inputs used in measuring fairvalue into the following three levels:

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

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 13.**               Fair Value Measurements(continued)

** **

The following tablepresents those financial assets and financial liabilities measured at fairvalue on a recurring basis as of March 31, 2009 (in thousands):

 
| ** **                                   | ** ** | **Fair Value**     | ** ** | ** **                        | ** ** | ** **  | ** ** | ** **  | ** ** |
|----------------------------------------------|------------|--------------------|------------|-----------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                   | ** ** | **March 31,** | ** ** | **Fair Value Measurements Using** | ** ** |
| ** **                                   | ** ** | **2009**           | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                  |       |               |       |                              |       |        |       |        |       |
| Hedged inventories                           |       | $                  | 219,483    |                              | $          | —      |       | $           | 219,483    |   | $ | — |   |
| Fair value of forward fixed price contracts  |       | 58,359             |       | —                            |       | 58,359      |       | —      |       |
| Swap agreements and options                  |       | 2,110              |       | 1,120                             |       | 990         |       | —      |       |
| Total assets                                 |       | $                  | 279,952    |                              | $          | 1,120       |       | $           | 278,832    |   | $ | — |   |
|                                         |       |               |       |                              |       |        |       |        |       |
| **Liabilities:**                             |       |               |       |                              |       |        |       |        |       |
| Obligations on forward fixed price contracts |       | $                  | (13,244    | )                                 | $          | —      |       | $           | (13,244    | ) | $ | — |   |
| Swap agreements and option contracts         |       | (2,803             | )          | (91                               | )          | (2,712      | )          | —      |       |
| Interest rate collars                        |       | (9,695             | )          | —                            |       | (9,695      | )          | —      |       |
| Total liabilities                            |       | $                  | (25,742    | )                                 | $          | (91         | )          | $           | (25,651    | ) | $ | — |   |

 

For assets andliabilities measured on a non-recurring basis during the period, SFAS No. 157requires quantitative disclosures about the fair value measurements separatelyfor each major category.  During thequarter ended March 31, 2009, the Partnership did not remeasure assets orliabilities at fair value on a non-recurring basis.

 

**Note 14.**              Income Taxes

** **

Thefollowing table presents a reconciliation of the difference between thestatutory federal income tax rate and the effective income tax rate for theperiods presented:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 31,**     | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Federal statutory income tax rate                 |       | 34                     | %          | 34 | % |
| State income tax rate, net of federal tax benefit |       | 6.4                    | %          | 6.4 | % |
| Partnership income not subject to tax             |       | (36.7                  | )%         | (38.7 | )% |
| Effective income tax rate                         |       | 3.7                    | %          | 1.7 | % |

 

**Note 15.**              Legal Proceedings

** **

***General***

 

Althoughthe Partnership may, from time to time, be involved in litigation and claimsarising out of its operations in the normal course of business, the Partnershipdoes not believe that it is a party to any litigation that will have a materialadverse impact on its financial condition or results of operations.  Except as described in the Partnership’sAnnual Report on Form 10-K for the year ended December 31, 2008 and in Note 11 included herein, the Partnershipis not aware of any significant legal or governmental proceedings against it,or contemplated to be brought against it. The Partnership maintains insurance policies with insurers in amountsand with coverage and deductibles as its general partner believes arereasonable and prudent.  However, thePartnership can provide no assurance that this insurance will be adequate toprotect it from all material expenses related to potential future claims orthat these levels of insurance will be available in the future at economicallyacceptable prices.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 16.**               Recent AccountingPronouncements

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157.  This statement defines fair value,establishes guidelines for measuring fair value and requires additionaldisclosures regarding fair value measurements. SFAS No. 157applies only to fair value measurements currently required or permitted byother accounting standards and is expected to increase the consistency of thosemeasurements.  The Partnership adopted SFAS No. 157on January 1, 2008 for its financial assets and liabilities measured at fair value on a recurringbasis and on January 1, 2009 for its non-financial assets and non-financialliabilities measured at fair value on a non-recurring basis which did not havea material impact on its consolidated financial statements.  See Note 13.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFASNo. 141(R)”) which retains the fundamental requirements of the originalpronouncement requiring that the purchase method be used for all businesscombinations.  SFAS No. 141(R) definesthe acquirer as the entity that obtains control of one or more businesses inthe business combination, establishes the acquisition date as the date that theacquirer achieves control and requires the acquirer to recognize the assetsacquired, liabilities assumed and any noncontrolling interest at their fairvalues as of the acquisition date.  SFAS No. 141(R) alsorequires that acquisition-related costs be recognized separately from theacquisition.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date occurs infiscal years beginning after December 15, 2008.  The Partnership adopted SFAS No. 141(R) onJanuary 1, 2009 which did not have a material impact on its consolidatedfinancial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — An Amendment of FASBStatement No. 133” (“SFAS No. 161”) which enhances therequirements under SFAS No. 133, “Accountingfor Derivatives and Hedging Activities.” SFAS No. 161 requires enhanced disclosures about an entity’sderivatives and hedging activities and how they affect an entity’s financialposition, financial performance and cash flows. The Partnership adopted SFAS No. 161 on January 1, 2009.  See Note 5.

 

In March 2008, theEITF approved consensus on EITF Issue No. 07-04, which specifies thetreatment of earnings per unit calculations when incentive distributions rightsexist in master limited partnerships.  UnderEITF 07-04, whenearnings exceed cash distributions, undistributed earnings are to be allocatedto the general partner, limited partners and holders of the incentivedistribution rights based on the distribution formula for available cash setforth in the partnership agreement. Conversely, when cash distributions exceed earnings, net income (orloss) would be reduced (or increased) by distributions to the general partner,limited partners and holders of incentive distribution rights.  The excess of distributions over earningswould be allocated to the general partner and limited partners based on theirrespective sharing of losses set forth in the partnership agreement.  EITF 07-04 is effective for fiscal years andinterim periods beginning after December 15, 2008 and is appliedretrospectively.  The Partnershipadopted EITF 07-04 on January 1, 2009.  See Note 2.

 

InApril 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  The objective of FSP FAS 142-3 is to improvethe consistency between the useful life of a recognized intangible asset underSFAS 142 and the period of expected cash flows used to measure the fairvalue of the asset under SFAS No. 141(R) and other GAAP.  FSP FAS 142-3 is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andinterim periods within those years.  The Partnership adopted FSP FAS 142-3 on January 1, 2009 which did nothave a material impact on its consolidated financial statements.

 

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

In June 2008, theFASB issued FASB Staff Position EITF 03-6-1,“Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities”(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 states that unvested share-based payment awardsthat contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities (as defined in EITF03-06) and, therefore, shouldbe included in the computation of earnings per share pursuant to the two-classmethod.  However, the award would not beconsidered a participating security if the holder forfeits the right to receivedividends or dividend equivalents in the event that the award does not vest.  FSP EITF 03-6-1 is effective for financial statements issued forfiscal years beginning after December 15, 2008 and interim periods withinthose years.  Upon adoption, FSP EITF 03-6-1 requires that allprior-period earnings per share data presented be adjustedretrospectively.  The Partnership adoptedFSP EITF 03-6-1 on January 1,2009 which did not have a material impact on its consolidated financialstatements.

 

InSeptember 2008, the FASB issued EITF 08-05,“Issuer’s Accounting for Liabilities Measured at Fair Value with a Third PartyCredit Enhancement” (“EITF 08-05”)which provides guidelines for the determination of the unit of accounting for aliability issued with an inseparable third-party credit enhancement when it ismeasured or disclosed at fair value on a recurring basis.  The effect of the credit enhancement is to beexcluded in the fair value measurement of the liability, and entities arerequired to disclose the existence of the inseparable third-party creditenhancement on the issued liability. EITF 08-05 iseffective on a prospective basis beginning in the first reporting period on orafter December 15, 2008, with the effect of initial application includedin the change in fair value of the liability in the period of adoption.  The Partnership adopted EITF 08-05 on January 1, 2009 which did not have a material impact on itsconsolidated financial statements.

 

**Note 17.**               Subsequent Event

** **

OnApril 22, 2009, theboard of directors of the General Partner declared a quarterly cashdistribution of $0.4875 per unit ($1.95 per unit on an annualized basis) forthe period from January 1, 2009 through March 31, 2009.  On May 15, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business May 7, 2009.

 

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

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

 

**Forward-LookingStatements**

** **

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

 
| · |   | We may not have  sufficient cash from operations to enable us to pay the minimum quarterly  distribution or maintain distributions at current levels following  establishment of cash reserves and payment of fees and expenses, including  payments to our general partner.                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | A significant decrease in demand for refined  petroleum products in the areas served by our storage facilities would reduce  our ability to make distributions to our unitholders.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Our sales of home heating oil and residual oil could  be significantly reduced by conversions to natural gas which conversions  could have an adverse effect on our financial condition, results of  operations and cash available for distribution to our unitholders.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Warmer weather  conditions could adversely affect our financial condition, results of  operations and cash available for distribution to our unitholders.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Our risk management  policies cannot eliminate all commodity risk. In addition, any noncompliance  with our risk management policies could result in significant financial  losses.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Our results of operations are influenced by the  overall forward market for refined petroleum products, and increases and/or  decreases in the prices of refined petroleum products may adversely impact  the amount of borrowing available for working capital under our credit  agreement, which credit agreement has borrowing base limitations and advance  rates. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | We are exposed to  trade credit risk in the ordinary course of our business activities.                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | We are exposed to risk  associated with our trade credit support in the ordinary course of our  business activities.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | The condition of  credit markets may adversely affect our liquidity.                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Due to our lack of  asset and geographic diversification, adverse developments in the terminals  that we use or in our operating areas could reduce our ability to make  distributions to our unitholders.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | We are exposed to  performance risk in our supply chain.                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Our general partner  and its affiliates have conflicts of interest and limited fiduciary duties,  which may permit them to favor their own interests to the detriment of  unitholders.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Unitholders have  limited voting rights and are not entitled to elect our general partner or  its directors or initially to remove our general partner without its consent,  which could lower the trading price of our common units.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Unitholders may be  required to pay taxes on their share of our income even if they do not  receive any cash distributions from us.                                                                                                                                                                                                                                    |

 

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Additionalinformation about risks and uncertainties that could cause actual results todiffer materially from forward-looking statements is contained in Part I,Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for theyear ended December 31, 2008 and Part II, Item 1A, “Risk Factors,” in thisQuarterly Report on Form 10-Q.

 

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

 

**Overview**

** **

***General***

*** ***

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in  Massachusetts,Maine, Connecticut, Vermont, New Hampshire, Rhode Island, New York andPennsylvania (collectively, the “Northeast”). We are one of the largest wholesale distributors of gasoline,distillates (such as home heating oil, diesel and kerosene) and residual oil towholesalers, retailers and commercial customers in the Northeast.  For the three months ended March 31,2009, we sold approximately $1.6 billion of refined petroleum products andsmall amounts of natural gas.

 

Wepurchase our refined petroleum products primarily from domestic and foreignrefiners (wholesalers), traders and producers and sell these products in twosegments, Wholesale and Commercial.  Likemost independent marketers of refined petroleum products, we base our pricingon spot physical prices and routinely use the NYMEX or other derivatives tohedge our commodity risk inherent in buying and selling energycommodities.  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.

 

***Productsand Operational Structure***

*** ***

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

 

Ourbusiness is divided into two segments:

 

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

 

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

 

Ourbusiness activities are substantially comprised of purchasing, storing,terminalling and selling refined petroleum products.  In a contango market (when product prices forfuture deliveries are higher than for current deliveries), we may use ourstorage capacity to improve our margins by storing products we have purchasedat lower prices in the current market for delivery to customers at higherprices in the future.  In a backwardatedmarket (when product prices for future deliveries are lower than currentdeliveries), we attempt to minimize our inventories to reduce commodity riskand maintain or increase net product margins. See Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-Kfor the year ended December 31, 2008 for additional informationrelated to commodity risk.

 

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***Outlook***

*** ***

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

 

·              *The condition of credit markets may adversely affect ourliquidity. *In recentmonths, world financial markets experienced a severe reduction in theavailability of credit.  Although we havenot been negatively impacted by this condition in the short-term, it isdifficult to predict its impact on us in future quarters.  Possible negative impacts include a decreasein the availability of borrowings under our credit agreement, increasedcounterparty credit risk on our derivatives contracts and our contractualcounterparties requiring us to provide collateral.  In addition, we could experience a tighteningof trade credit from our suppliers.

 

·              *We commit substantialresources to pursuing acquisitions, though there is no certainty that we willsuccessfully complete any acquisitions or receive the economic results weanticipate from completed acquisitions.*  Consistent with our business strategy, we arecontinuously engaged in discussions with potential sellers of terminalling,storage and/or marketing assets and related businesses.  In an effort to prudently and economicallyleverage our asset base, knowledge base and skill sets, management pursuesbusinesses that are closely related to or significantly intertwined with ourexisting lines of business.  Our growthlargely depends on our ability to make accretive acquisitions.  We may be unable to make such accretiveacquisitions for a number of reasons, including, but not limited to, thefollowing:  (1) we are unable toidentify attractive acquisition candidates or negotiate acceptable purchasecontracts; (2) we are unable to raise financing for such acquisitions oneconomically acceptable terms; or (3) we are outbid by competitors.  In addition, we may consummate acquisitionsthat at the time of consummation we believe will be accretive, but thatultimately may not be accretive.  If anyof these events were to occur, our future growth would be limited.  We can give no assurance that our acquisitionefforts will be successful or that any such acquisition will be completed onterms that are favorable to us.

 

·              *Ourfinancial results are generally better in the first and fourth quarters of thecalendar year. *Demandfor some refined petroleum products, specifically home heating oil and residualoil for space heating purposes, is generally higher during November throughMarch than during April through October.  We obtain a significant portion of thesesales during these winter months. Therefore, our results of operations for the first and fourth calendarquarters are generally 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 tomaintain current levels of distributions to our unitholders.

 

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

 

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

 

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·              *Our financial condition and results of operationsare influenced by the overall forward market for refined petroleum products,and increases and/or decreases in the prices of refined petroleum products mayadversely impact the amount of borrowing available for working capital underour credit agreement, which credit agreement has borrowing base limitations andadvance rates.* Results from our supply, marketing and terminalling operations areinfluenced by prices for refined petroleum products, pricing volatility and themarket for such products.  When pricesfor refined petroleum products rise, some of our customers may haveinsufficient credit to purchase supply from us at their historical purchasevolumes, and their customers, in turn, may adopt conservation measures whichreduce consumption, thereby reducing demand for product.  Furthermore, when prices increase rapidly anddramatically, we may be unable to promptly pass our additional costs to ourcustomers, resulting in lower margins for us which could adversely affect ourresults of operation.  Lastly, higherprices for refined petroleum prices may (1) diminish our access to tradecredit support and/or cause it to become more expensive and (2) decreasethe amount of borrowings available for working capital under our creditagreement as a result of total available commitments, borrowing baselimitations and advance rates thereunder. In addition, when prices for refined petroleum products decline, ourexposure to risk of loss in the event of nonperformance by our customers of ourforward contracts may be increased as they and/or their customers may breachtheir contracts and purchase refined petroleum products at the then lower spotand/or retail market price.  Furthermore,lower prices for refined petroleum products may diminish the amount ofborrowings available for working capital under our working capital revolvingcredit facility as a result of borrowing base limitations.

 

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

 

**Results of Operations**

** **

***EvaluatingOur Results of Operations***

*** ***

Our management usesa variety of financial and operational measurements to analyze ourperformance.  Thesemeasurements include: (1) net product margin, (2) gross profit, (3) selling,general and administrative expenses (“SG&A”), (4) operating expenses, (5) degreedays, (6) net income per diluted limited partner unit, (7) earningsbefore interest, taxes, depreciation and amortization (“EBITDA”) and (8) distributablecash flow.

 

*NetProduct Margin*

* *

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

 

*Gross Profit*

 

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

 

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*Selling,General and Administrative Expenses*

* *

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

 

*OperatingExpenses*

* *

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.

 

*DegreeDay*

* *

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.

 

*Net Income Per Diluted Limited Partner Unit*

 

We use net income per diluted limited partner unit to measure our financialperformance on a per-unit basis.  Netincome per diluted limited partner unit is defined as net income, divided bythe weighted average number of outstanding diluted common and subordinatedunits, or limited partner units, during the period.

 

*EBITDA*

* *

EBITDAis a non-GAAP financial measure used as a supplemental financial measure bymanagement and external users of our consolidated financial statements, such asinvestors, commercial banks and research analysts, to assess:

 

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

 

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

 

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

 

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

 

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

 

EBITDAshould not be considered as an alternative to net income, operating income, cashflow from operating activities or any other measure of financial performance orliquidity presented in accordance with GAAP. EBITDA excludes some, but not all, items that affect net income, andthis measure may vary among other companies. Therefore, EBITDA may not be comparable to similarly titled measures ofother companies.

 

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*DistributableCash Flow*

* *

Distributablecash flow is an important non-GAAP financial measure for our limited partnerssince it serves as an indicator of our success in providing a cash return ontheir investment.  Distributable cashflow means our net income plus depreciation and amortization less ourmaintenance capital expenditures. Specifically, this financial measure indicates to investors whether ornot we have generated sufficient cash flow on a current or historic level thatcan sustain or support an increase in our quarterly cash distribution.  Distributable cash flow is a quantitativestandard used by the investment community with respect to publicly tradedpartnerships.  Distributable cash flowshould not be considered as an alternative to net income, cash flow fromoperations, or any other measure of financial performance presented inaccordance with GAAP.  In addition, ourdistributable cash flow may not be comparable to distributable cash flow orsimilarly titled measures of other companies.

 

***ThreeMonths Ended March 31, 2009 and 2008***

*** ***

Duringthe first quarter of 2009, we experienced the following events:

 

·                  Refinedpetroleum product prices dramatically declined compared to the same period in2008 which we believe contributed to lower revenues and lower financing costsas a result of decreased borrowings to finance inventory.

 

·                  Temperaturesfor the first quarter of 2009 were 4% colder than normal and 9% colder than thefirst quarter of 2008, while temperatures for the first quarter of 2008 were 6%warmer than normal.

 

·                  We increasedour reserve for credit losses by approximately $0.6 million.

 

·                  We had fewerfixed priced sales of heating oil in the first quarter of 2009 than in thefirst quarter of 2008.

 

·                  At timesduring the first quarter of 2009, residual oil competed more favorably withnatural gas.

 

·                  We believeheating oil conservation continued during the quarter even though pricesdeclined.

 

·                  Additionally,we experienced the following events during the first quarter of 2008 that wedid not experience during the first quarter of 2009:

 

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

 

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

 

·                  Temporarylogistical supply issues related to rail capacity adversely affected theperformance of our Burlington, Vermont facility.

 

The following table provides the percentage decreases in refinedpetroleum product and natural gas prices at March 31, 2009 as compared to March 31,2008:

 
| **Period:**       | ** ** | **Heating  Oil   $ per  gallon(1)** | ** ** | **Gasoline  $ per  gallon(1)** | ** ** | **Residual   Oil  $ per  barrel(2)** | ** ** | **Natural  Gas   $ per barrel  equivalent(3)** | ** ** |
|-------------------|------------|------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------|------------|
| At March 31, 2008 |       | $                                        | 3.05       |                                | $          | 2.62                                      |       | $                                                        | 72.75      |   | $ | 64.38 |   |
| At March 31, 2009 |       | $                                        | 1.34       |                                | $          | 1.40                                      |       | $                                                        | 40.00      |   | $ | 25.96 |   |
| Change            |       | (56)%                                    |       | (47)%                               |       | (45)%                                     |       | (60)%                                                    |       |

 

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***(1)    Source: ***New YorkMercantile Exchange

***(2)    Source:  Platts OilgramPrice Report***

***(3)    Source:  Platts Gas DailyReport***

*** ***

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*** ***

***KeyPerformance Indicators***

*** ***

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 31,**               | ** ** |
| ** **                                             | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net income                                             |       | $                                | 18,863     |   | $ | 8,619 |   |
|                                                   |       |                             |       |   |   |
| Net income per diluted limited partner unit  (1)       |       | $                                | 1.40       |   | $ | 0.64 |   |
|                                                   |       |                             |       |   |   |
| EBITDA (2)                                             |       | $                                | 27,366     |   | $ | 18,476 |   |
|                                                   |       |                             |       |   |   |
| Distributable cash flow (3)                            |       | $                                | 21,996     |   | $ | 11,809 |   |
|                                                   |       |                             |       |   |   |
| **Wholesale Segment:**                                 |       |                             |       |   |   |
| Volume (gallons)                                       |       | 1,038,619                        |       | 1,002,323 |   |
| Sales                                                  |       |                             |       |   |   |
| Distillates                                            |       | $                                | 1,006,616  |   | $ | 1,603,410 |   |
| Gasoline                                               |       | 501,659                          |       | 975,068 |   |
| Residual oil                                           |       | 11,490                           |       | 18,357 |   |
| Total                                                  |       | $                                | 1,519,765  |   | $ | 2,596,835 |   |
| Net product margin (4)                                 |       |                             |       |   |   |
| Distillates                                            |       | $                                | 33,853     |   | $ | 23,092 |   |
| Gasoline                                               |       | 11,786                           |       | 8,544 |   |
| Residual oil                                           |       | 2,820                            |       | 3,896 |   |
| Total                                                  |       | $                                | 48,459     |   | $ | 35,532 |   |
| **Commercial Segment:**                                |       |                             |       |   |   |
| Volume (gallons)                                       |       | 75,728                           |       | 61,811 |   |
| Sales                                                  |       | $                                | 113,190    |   | $ | 124,157 |   |
| Net product margin (4)                                 |       | $                                | 4,928      |   | $ | 2,606 |   |
| **Combined sales and net product margin:**             |       |                             |       |   |   |
| Sales                                                  |       | $                                | 1,632,955  |   | $ | 2,720,992 |   |
| Net product margin (4)                                 |       | $                                | 53,387     |   | $ | 38,138 |   |
| Depreciation allocated to cost of sales                |       | 2,673                            |       | 2,522 |   |
| **Combined gross profit**                              |       | $                                | 50,714     |   | $ | 35,616 |   |
|                                                   |       |                             |       |   |   |
| **Weather conditions:**                                |       |                             |       |   |   |
| Normal heating degree days                             |       | 2,870                            |       | 2,901 |   |
| Actual heating degree days                             |       | 2,977                            |       | 2,728 |   |
| Variance from normal heating degree days               |       | 4%                               |       | (6)% |   |
| Variance from prior period actual heating  degree days |       | 9%                               |       | (7)% |   |

 

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(1)            SeeNote 2 of Notes to Consolidated Financial Statements for net income per dilutedlimited partner unit calculation.

(2)            EBITDAis a non-GAAP financial measure which is discussed above under “—EvaluatingOur Results of Operations.”  The tablebelow presents reconciliations of EBITDA to the most directly comparable GAAPfinancial measures.

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

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

 

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The following table presents reconciliations of EBITDAto the most directly comparable GAAP financial measures on a historical basisfor each period presented (in thousands):

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Reconciliation of net income to EBITDA:**                                  |       |                             |       |   |   |
| Net income                                                                   |       | $                                | 18,863     |   | $ | 8,619 |   |
| Depreciation and amortization and  amortization of deferred financing fees   |       | 4,002                            |       | 3,682 |   |
| Interest expense                                                             |       | 3,776                            |       | 6,030 |   |
| Income tax expense                                                           |       | 725                              |       | 145 |   |
| EBITDA                                                                       |       | $                                | 27,366     |   | $ | 18,476 |   |
|                                                                         |       |                             |       |   |   |
| **Reconciliation of cash flow provided by  operating activities to EBITDA:** |       |                             |       |   |   |
| Cash flow provided by operating activities                                   |       | $                                | 111,230    |   | $ | 97,817 |   |
| Net changes in operating assets and  liabilities and certain non-cash items  |       | (88,365                          | )          | (85,516 | ) |
| Interest expense                                                             |       | 3,776                            |       | 6,030 |   |
| Income tax expense                                                           |       | 725                              |       | 145 |   |
| EBITDA                                                                       |       | $                                | 27,366     |   | $ | 18,476 |   |

 

The following table presents reconciliationsof distributable cash flow to the most directly comparable GAAP financialmeasures on a historical basis for each period presented (in thousands):

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Reconciliation of net income to  distributable cash flow:**                                 |       |                             |       |   |   |
| Net income                                                                                    |       | $                                | 18,863     |   | $ | 8,619 |   |
| Depreciation and amortization and  amortization of deferred financing fees                    |       | 4,002                            |       | 3,682 |   |
| Maintenance capital expenditures                                                              |       | (869                             | )          | (492 | ) |
| Distributable cash flow                                                                       |       | $                                | 21,996     |   | $ | 11,809 |   |
|                                                                                          |       |                             |       |   |   |
| **Reconciliation of cash flow provided by  operating activities to distributable cash flow:** |       |                             |       |   |   |
| Cash flow provided by operating activities                                                    |       | $                                | 111,230    |   | $ | 97,817 |   |
| Net changes in operating assets and  liabilities and certain non cash items                   |       | (88,365                          | )          | (85,516 | ) |
| Maintenance capital expenditures                                                              |       | (869                             | )          | (492 | ) |
| Distributable cash flow                                                                       |       | $                                | 21,996     |   | $ | 11,809 |   |

 

***Consolidated Results***

 

Ourtotal sales for the first quarter of 2009 decreased by $1,088.0 million,or 40%, to $1,633.0 million compared to $2,721.0 million for the sameperiod in 2008.  The decrease was driven primarily by significantly lower refinedpetroleum product and natural gas prices for the three months ended March 31,2009 compared to the same period in 2008. Our aggregate volume of product sold increased by approximately 50 million gallons, or 5%, to 1,114** **milliongallons.  The increase in volumeprimarily includes increases of approximately 43 million gallons in distillates, attributableto colder temperatures during the first quarter of 2009 compared to thesame period in 2008.  Our gross profit for the first quarterof 2009 was $50.7** **million, an increase of$15.1** **million, or 42%, compared to$35.6** **million for the same period in2008.  The increase was primarily due tohigher net product margins in distillates and gasoline.

 

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*WholesaleSegment*

* *

Distillates.  Wholesale distillate sales for the threemonths ended March 31, 2009 were $1,006.6 million compared to$1,603.4 million for the three months ended March 31, 2008.  The decrease of $596.8 million, or 37%,was due to the decrease in refined petroleum product prices, despite a36 million gallon increase in volume sold for the first quarter of 2009compared to the same period in 2008.  Weattribute the increase in volume sold primarily to colder temperatures.  Ournet product margin from distillate sales increased by $10.8 million to$33.9 million for the three months ended March 31, 2009 compared tothe same period in 2008, primarily attributable to better unit margins and anincrease in volume.

 

Gasoline.  Wholesale gasoline sales for the three monthsended March 31, 2009 were $501.7 million compared to $975.1 millionfor the same period in 2008.  Thedecrease of $473.4 million, or 49%, was due primarily tosignificantly lower gasoline prices and lower gasoline volume sold compared tothe prior year.  The reduction in gasoline volume was relatedto particular supply-related costs of product during the quarter.  Our net product margin from gasolinesales increased by $3.3 million to $11.8 million for the three monthsended March 31, 2009 compared to the same period in 2008, primarilyattributable to better unit margins.

 

ResidualOil.  Wholesale residualoil sales for the three months ended March 31, 2009 were$11.5 million compared to $18.3 million for the three months ended March 31,2008.  The decrease of $6.8 million,or 37%, was primarily due to the decrease in refined petroleum product prices,despite a 1.9 million gallon increase in residual oil volume sold.  The increase in volume sold was the result ofresidual oil being more competitive against natural gas during thequarter.  Our net product margin contribution from residual oil salesdecreased by $1.1 million, or 28%, to $2.8 million for the threemonths ended March 31, 2009 compared to the same period in 2008 due tointensified competition in the marketplace.

 

*CommercialSegment*

* *

Inour Commercial segment, residual oil accounted for approximately 70% and 71% oftotal commercial volume sold for the three months ended March 31, 2009 and2008, respectively.  Distillates,gasoline and natural gas accounted for the remainder of the total volume sold.

 

Commercialresidual oil sales for the quarter ended March 31, 2009 decreased by 21%compared to the same period in 2008 despite a 16% increase in volume sold.  We attribute the decrease in sales to thecompetitive pricing from natural gas and reductions in production by certainindustry participants in our markets.

 

*Selling, General and Administrative Expenses*

 

SG&Aexpenses increased by $7.0 million, or 63%, to $18.1 million for thethree months ended March 31, 2009 compared to $11.1 million for thesame period in 2008.  The increase wasprimarily due to increases of $4.9 million in accrued bonuses,$0.6 million in professional fees, $0.6 million in bad debt accrualdue to some credit strain on our customer base, $0.4 million in bank fees,$0.3 million in compensation cost on our long-term incentive plan and$0.2 million in other SG&A expenses.

 

*OperatingExpenses*

* *

Operatingexpenses decreased by $0.5 million, or 6%, to $8.5 million for thethree months ended March 31, 2009 compared to $9.0 million for thesame period in 2008.  The decrease wasprimarily due to $0.5 million in cost savings related to the non-renewalof the terminal lease in New Haven, Connecticut and a $0.2 milliondecrease in other operating costs, offset by increased costs of approximately$0.2 million related to our recently leased storage facility in LongIsland, New York.

 

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***Interest Expense***

*** ***

Interestexpense for the three months ended March 31, 2009 decreased by$2.2 million, or 37%, to $3.8 million compared to $6.0 millionfor the same period in 2008.  Weattribute the decrease primarily to lower average balances on our workingcapital credit facility from carrying lower average balances on inventories andaccounts receivable due to lower refined petroleum product prices.  In addition, interest rates were lower duringthe first quarter of 2009 compared to the same period in 2008, and we haddecreased borrowings on our working capital revolving credit facility.  The decrease in interest expense waspartially offset by an increase in the costs of borrowings commencing with the July 18,2008 amendment to the credit agreement.

 

**Liquidity and CapitalResources**

** **

***Liquidity***

** **

Our primary liquidity needs are to fund our working capitalrequirements and our capital expenditures. Cash generated from operations and our working capital revolving creditfacility provide our primary sources of liquidity.  Working capital increased by$43.0 million to $241.6 million at March 31, 2009 compared to$198.6 million at December 31, 2008.

 

On February 13,2009, we paid a cash distribution to our common and subordinated unitholdersand our general partner of approximately $6.5 million for the fourthquarter of 2008.  On April 22, 2009,the board of directors of our general partner declared a quarterly cash distributionof $0.4875 per unit for the period from January 1, 2009through March 31, 2009 ($1.95 per unit on an annualized basis) to ourcommon and subordinated unitholders of record as of the close of business May 7, 2009.  We expect to pay the cashdistribution of approximately $6.5 million on May 15, 2009.

 

***CapitalExpenditures***

*** ***

Our terminalling operations require investments to expand, upgrade andenhance existing operations and to meet environmental and operationsregulations.  Our capital requirements primarilyconsist of maintenance capital expenditures and expansion capitalexpenditures.  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 expendituresrequired to maintain equipment reliability, tankage and pipeline integrity andsafety, and to address environmental regulations.  We anticipate that maintenance capitalexpenditures will be funded with cash generated by operations.  We had approximately $0.9 million and$0.5 million in maintenance capital expenditures for the three monthsended March 31, 2009 and 2008, respectively, which are included in capitalexpenditures in the accompanying consolidated statements of cash flows.  Repair and maintenance expenses associatedwith existing assets that are minor in nature and do not extend the useful lifeof existing assets are charged to operating expenses as incurred.

 

Expansioncapital expenditures include expenditures to acquire assets to grow ourbusiness and to expand existing facilities, such as projects that increaseoperating capacity by increasing tankage, diversifying product availability atvarious terminals and adding terminals. We generally fund our expansion capitalexpenditures through our cash generated from operations or our acquisition andworking capital revolving credit facilities or by issuing additionalequity.  We had approximately$1.6 million and $2.7 million in expansion capital expenditures forthe three months ended March 31, 2009 and 2008, respectively, to increaseour operating capacity and capabilities. Specifically, for the three months ended March 31, 2009, expansioncapital expenditures consisted of approximately $1.0 million in costsrelated to dock expansion and bringing formerly out-of-service tanks backonline at the Albany, New York terminal and $0.6 million in additionalterminal equipment at the Providence, Rhode Island terminal.  Comparatively, for the three months ended March 31,2008, expansion capital expenditures included $1.4 million in expendituresrelated to construction in process on our then newly leased terminal inProvidence, Rhode Island and $1.3 million in other expansion capital expenditures,including approximately $0.5 million related to conversion expenditures tohandle ethanol-based gasoline at the Albany, New York terminal.

 

We believe that we will have cash flow from operations, borrowingcapacity under our credit agreement and the ability to issue additional commonunits and/or debt securities to meet our financial commitments, debt serviceobligations, contingencies and anticipated capital expenditures.  However, we are subject to business andoperational risks that could adversely affect our cash flow.  A material decrease in our cash flows wouldlikely produce an adverse effect on our borrowing capacity.

 

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***CashFlow***

*** ***

The following table summarizes cash flow activity (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31,**               | ** ** |
| ** **                                | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net cash provided by operating activities |       | $                                | 111,230    |   | $ | 97,817 |   |
| Net cash used in investing activities     |       | $                                | (2,452     | ) | $ | (3,186 | ) |
| Net cash used in financing activities     |       | $                                | (106,734   | ) | $ | (93,217 | ) |

 

Cash flow from operating activities generally reflects our net income,the purchasing patterns of inventory, the timing of collections on our accountsreceivable, the seasonality of our business, fluctuations in refined petroleumproduct prices, our working capital requirements related to acquisitions andgeneral market conditions.

 

Net cash provided by operating activities was $111.2 million forthe three months ended March 31, 2009 compared to $97.8 million forthe three months ended March 31, 2008, for a year-over-year increase incash provided by operating activities of $13.4 million.

 

During the three months ended March 31, 2009, refined petroleumproduct and natural gas prices declined significantly compared to the sameperiod in 2008, causing the carrying values of our accounts receivable,inventories and accounts payable for the three months ended March 31, 2009to be less than the carrying values we experienced for the three months ended March 31,2008.  As a result, we had decreases of$21.1 million in accounts receivable, $12.5 million in inventoriesand $60.2 million in accounts payable.

 

The increase in cash provided by operating activities is also reflectedin the year-over-year increase in net income of $10.2 million and a$143.2 million change in the fair value of our forward fixed pricecontracts and other derivatives.  For thethree months ended March 31, 2009, contracts supporting our forward fixedprice hedge program provided funds from the NYMEX of approximately $108.7 million while for the three monthsended March 31, 2008 similar hedging activity required margin payments ofapproximately $34.5 million to the NYMEXdue to market direction.

 

Net cash used in investing activities decreased by $0.7 millionfor the three months ended March 31, 2009 compared to the same period in2008 and included $0.9 million in maintenance capital expenditures and$1.6 million in expansion capital expenditures ($1.0 million in costsrelated to dock expansion and bringing formerly out-of-service tanks backonline at the Albany, New York terminal and $0.6 million in additionalterminal equipment at the Providence, Rhode Island terminal).  Comparatively, for the three months ended March 31,2008, net cash used in investing activities included $3.2 million in totalcapital expenditures comprised of $0.5 million in maintenance capitalexpenditures and $2.7 million in expansion capital expenditures($1.4 million related to construction in process on our leased terminal inProvidence, Rhode Island and $1.3 million in other expansion capitalexpenditures).

 

Net cash used in financing activities increased by $13.5 millionfor the three months ended March 31, 2009 compared to the same period in2008 and included $100.2 million in net payments on our credit facilitiesand $6.5 million in cash distributions to our common and subordinatedunitholders and our general partner. Comparatively, for the three months ended March 31, 2008, net cashused in financing activities included $86.6 million in net payments on ourcredit facilities and $6.5 million in cash distributions to our common andsubordinated unitholders and our general partner.

 

***Credit Agreement***

 

We, our general partner, our operating company and our operatingsubsidiaries have a four-year senior secured credit agreement with totalavailable commitments of $750.0 million. We repay amounts outstanding and reborrow funds based on our workingcapital requirements and, therefore, classify as a current liability theportion of the working capital revolving credit facility we expect to pay downduring the course of the year.  Thelong-term portion of the working capital revolving credit facility is theamount we expect to be outstanding during the entire year.  The credit agreement will mature on April 22,2011.

 

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There are three facilitiesunder our credit agreement:

 

·             a workingcapital revolving credit facility to be used for working capital purposes andletters of credit in the principal amount equal to the lesser of our borrowingbase and $650.0 million; the $650.0 million includes two$50.0 million seasonal overline facilities that are available each yearonly during the period between September 1 and June 30;

 

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

 

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

 

In addition, the credit agreement has an accordion feature whereby wemay request on the same terms and conditions of our then existing creditagreement, provided no Event of Default (as defined in the credit agreement) thenexists, an increase to:  (1) theacquisition facility by up to another $50.0 million, for a totalacquisition facility of up to $135.0 million; and (2) the workingcapital revolving credit facility by up to another $200.0 million, for atotal working capital revolving credit facility of up to $850.0 million.  Any such request for an increase by us mustbe in a minimum amount of $5.0 million, and no more than three suchrequests may be made for each facility. We, however, cannot provide assurance that our lending group will agreeto fund any request by us for additional amounts in excess of the totalavailable commitments of $750.0** **million.

 

Availability under our working capital revolving credit facility issubject to a borrowing base which is redetermined from time to time and basedon specific advance rates on eligible current assets.  Under the credit agreement, we can borrowonly up to the level of our then current borrowing base.  Availability under our borrowing base may beaffected by events beyond our control, such as changes in refined petroleumproduct prices, collection cycles, counterparty performance, advance rates andlimits and deteriorating economic conditions. These and other events could require us to seek waivers or amendments ofcovenants or alternative sources of financing or to reduce expenditures.  We can provide no assurance that suchwaivers, amendments or alternative financing could be obtained, or if obtained,would be on terms acceptable to us.

 

During the period from January 1, 2008 through July 20, 2008,borrowings under our working capital revolving credit, acquisition andrevolving credit facilities bore interest at our option at (1) theEurodollar rate, plus 1%, 11⁄2% and 11⁄2%, respectively, (2) the cost of fundsrate, plus 1%, 13⁄4% and 11⁄2%, respectively, or (3) the bank’s baserate.  Commencing July 21, 2008, borrowingsunder the working capital revolving credit facility bear interest at (1) theEurodollar rate plus 1.75% to 2.25%, (2) the cost of funds rate plus 1.75%to 2.25%, or (3) the base rate plus 0.75% to 1.25%, each depending on thepricing level provided in the credit agreement, which in turn depends upon theCombined Interest Coverage Ratio (as defined in the credit agreement).  Commencing July 21, 2008, borrowings under the acquisition andrevolving credit facilities bear interest at (1) the Eurodollar rate plus2.25% to 2.75%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio.  The average interest ratefor the three months ended March 31, 2009 and 2008 were approximately 3.9%and 4.6%, respectively.

 

We incur a letter of credit fee of 2% per annum for each letter ofcredit issued.  In addition, we incur 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 us) equal to 0.3% to 0.375% per annum, depending on thepricing level and the Combined Interest Coverage Ratio provided in the creditagreement.  We also incur a facility feeof 0.1% per annum on any unexercised seasonal overline facility during theperiod between September 1 and June 30 and a seasonal overline fee of$30,000 each time we elect to exercise either of the seasonal overlinefacilities.

 

As of March 31, 2009, we had total borrowings outstanding underour credit agreement of $333.3 million, including $71.2 millionoutstanding on our acquisition facility, and outstanding letters of credit of$61.0 million.  The total remainingavailability for borrowings and letters of credit at March 31, 2009 and December 31,2008 was $355.7 million and $211.3 million, respectively.

 

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The credit agreement imposes financial covenants that require us tomaintain certain minimum working capital amounts, capital expenditure limits, aminimum EBITDA ratio, a minimum combined interest coverage ratio and a maximumleverage ratio.  We were in compliancewith the foregoing covenants at March 31, 2009.  The credit agreement also contains arepresentation whereby there can be no event or circumstance, eitherindividually or in the aggregate, that has had or could reasonably be expectedto have a Material Adverse Effect (as defined in the credit agreement).

 

The credit agreement provides that in each calendar year theoutstanding amount under the working capital revolving credit facility must beequal to or less than $263.0 million for a period of ten consecutivecalendar days.  We have complied withthis provision for the year ending December 31, 2009.  It is anticipated that the seasonal decreasein working capital as we exit our heating season will contribute to a decreasein borrowings outstanding under our credit agreement.

 

The credit agreement limits distributions to our unitholders toavailable cash and permits borrowings to fund such distributions only under the$15.0 million revolving credit facility. The revolving credit facility is subject to an annual “clean-down”period, requiring us to reduce the amount outstanding under the revolvingcredit facility to $0 for 30 consecutive calendar days in each calendaryear.  We have complied with thisprovision for the year ending December 31, 2009.

 

Our obligations under the credit agreement are secured by substantiallyall of our assets and the assets of our operating company and operatingsubsidiaries.

 

The lending group under the credit agreement includes the followinginstitutions:  Bank of America, N.A.;Standard Chartered Bank; JPMorgan Chase Bank, N.A.; Societe Generale; RBSCitizens, National Association; Sovereign Bank; Fortis Capital Corp.; WebsterBank National Association; KeyBank National Association; TD Bank, N.A.(f/k/a TD BankNorth, N.A.); Wells Fargo Bank, N.A.; Wachovia Bank, NationalAssociation; and Calyon New York Branch.

 

***Off-Balance Sheet Arrangements***

 

We have no off-balance sheet arrangements.

 

**CriticalAccounting Policies and Estimates**

** **

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations discusses our consolidated financial statements, which have beenprepared in accordance with GAAP.  Thepreparation of these consolidated financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results may differ from these estimates under differentassumptions or conditions.

 

These estimates are based on our knowledge and understanding of currentconditions and actions that we may take in the future.  Changes in these estimates will occur as aresult of the passage of time and the occurrence of future events.  We have identified the following estimatesthat, in our opinion, are subjective in nature, require the exercise ofjudgment, and involve complex analysis: inventory, leases, revenue recognition, derivative financial instrumentsand environmental and other liabilities.

 

The significant accounting policies and estimates that we have adoptedand followed in the preparation of our consolidated financial statements aredetailed in Note 2 of Notes to Consolidated Financial Statements, “Summaryof Significant Accounting Policies” included in our Annual Report on Form 10-Kfor the year ended December 31, 2008. 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.

 

**Recent Accounting Pronouncements**

 

A description and related impact expected from the adoption of certainnew accounting pronouncements is provided in Note 16 of Notes toConsolidated Financial Statements.

 

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**Item 3.        Quantitative and Qualitative Disclosuresabout Market Risk**

 

Market risk is the risk of loss arising from adverse changes in marketrates and prices.  The principal marketrisks to which we are exposed are interest rate risk and commodity risk.  We utilize two interest rate collars tomanage exposure to interest rate risk and various derivative instruments tomanage exposure to commodity risk.

 

***Interest Rate Risk***

 

We utilize variable rate debt and are exposed to market risk due to thefloating interest rates on our credit facility. Therefore, from time to time, we utilize interest rate collars to hedgeinterest obligations on specific and anticipated debt issuances.

 

During the period from January 1, 2008 through July 20, 2008,borrowings under our working capital revolving credit, acquisition credit andrevolving credit facilities bore interest at our option at (1) theEurodollar rate, plus 1%, 11⁄2% and 11⁄2 %, respectively, (2) the cost offunds rate, plus 1%, 13⁄4% and 11⁄2 %, respectively, or (3) the bank’s baserate.  Commencing July 21, 2008, borrowingsunder the working capital revolving credit facility bear interest at (1) theEurodollar rate plus 1.75% to 2.25%, (2) the cost of funds rate plus 1.75%to 2.25%, or (3) the base rate plus 0.75% to 1.25%, each depending on thepricing level provided in the credit agreement, which in turn depends upon theCombined Interest Coverage Ratio (as defined in the credit agreement).  Commencing July 21, 2008, borrowings under the acquisition andrevolving credit facilities bear interest at (1) the Eurodollar rate plus2.25% to 2.75%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio.  The average interest ratesfor the three months ended March 31, 2009 and 2008 were approximately 3.9%and 4.6%, respectively.

 

As of March 31, 2009, we had total borrowings outstanding underthe credit agreement of $333.3 million. The impact of a 1% increase in the interest rate on this amount of debtwould have resulted in an increase in interest expense, and a correspondingdecrease in our results of operations, of approximately $3.3 millionannually, assuming, however, that our indebtedness remained constant throughoutthe year.

 

We executed twozero premium interest rate collars with major financial institutions.  Each collar is designated as a cash flowhedge and accounted for under the provisions of SFAS No. 133.  The first collar, which became effective on May 14,2007 and expires on May 14, 2011, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. Under the first collar, we capped our exposure at a maximum three-monthLIBOR rate of 5.75% and established a minimum floor rate of 3.75%.  Whenever the three-month LIBOR rate isgreater than the cap, we receive from the respective financial institution thedifference between the cap and the current three-month LIBOR rate on the $100.0 million of three-monthLIBOR-based borrowings.  Conversely,whenever the three-month LIBOR rate is lower than the floor, we remit to therespective financial institution the difference between the floor and thecurrent three-month LIBOR rate on the $100.0 million of three-monthLIBOR-based borrowings.  As of March 31,2009, the three-month LIBOR rate of 1.23% was lower than the floor rate.  As a result, in April 2009, we willremit to the respective financial institution the difference between the floorrate and the current rate which amounted to approximately $300,500.

 

On September 29,2008, we executed our second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge thevariability in cash flows in monthly interest payments made on our $100.0 million one-monthLIBOR-based borrowings (and subsequent refinancings thereof) due to changes inthe one-month LIBOR rate.  Under thesecond collar, we capped our exposure at a maximum one-month LIBOR rate of5.50% and established a minimum floor rate of 2.70%.  Whenever the one-month LIBOR rate is greaterthan the cap, we receive from the respective financial institution thedifference between the cap and the current one-month LIBOR rate on the $100.0 million of one-monthLIBOR-based borrowings.  Conversely,whenever the one-month LIBOR rate is lower than the floor, we remit to therespective financial institution the difference between the floor and thecurrent one-month LIBOR rate on the $100.0 million of one-month LIBOR-based borrowings.  As of March 31, 2009, theone-month LIBOR rate of 0.50% was lower than the floor rate.  As a result, in April 2009, we willremit to the respective financial institution the difference between the floorrate and the current rate which amounted to approximately $184,000.  SeeNote 5 ofNotes to Consolidated Financial Statements for further discussion on theinterest rate collars.

 

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***Commodity Risk***

 

We hedge our exposure to price fluctuations with respect to refinedpetroleum products in storage and expected purchases and sales of thesecommodities.  The derivative instrumentsutilized consist primarily of futures contracts traded on the NYMEX andover-the-counter transactions, including swap agreements entered into withestablished financial institutions and other credit-approved energycompanies.  Our policy is generally topurchase only products for which we have a market and to structure our salescontracts so that price fluctuations do not materially affect our profit.  While our policies are designed to minimizemarket risk, some degree of exposure to unforeseen fluctuations in marketconditions remains.  Except for thecontrolled trading program discussed below, we do not acquire and hold futurescontracts or other derivative products for the purpose of speculating on pricechanges that might expose us to indeterminable losses.

 

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

 

We enter into futures contracts to minimize or hedge the impact ofmarket fluctuations on our purchases and forward fixed price sales of refinedpetroleum products.  Any hedgeineffectiveness is reflected in our results of operations.  We utilize the NYMEX, which is a regulatedexchange for energy products that it trades, thereby reducing potentialdelivery and supply risks.  Generally,our practice is to close all NYMEX positions rather than to make or receivephysical deliveries.  With respect toother energy products, we enter into derivative agreements with counterpartiesthat we believe have a strong credit profile, in order to hedge marketfluctuations and/or lock-in margins relative to our commitments.

 

At March 31, 2009, the fair value of all of our commodity riskderivative instruments and the change in fair value that would be expected froma 10% price increase are shown in the table below (in thousands):

 

Gain (loss):

 
| ** **                    | ** ** | **Fair Value at  March 31, 2009** | ** ** | **Effect of 10%  Price Increase** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| NYMEX contracts               |       | $                                                     | 19,384     |                                             | $          | (8,207 | ) |
| Swaps, options and other, net |       | (693                                                  | )          | (1,870                                           | )          |
|                          |       | $                                                     | 18,691     |                                             | $          | (10,077 | ) |

 

The fair values of the futures contracts are based on quoted marketprices obtained from the NYMEX.  The fairvalue of the swaps and option contracts are estimated based on quoted pricesfrom various sources such as independent reporting services, industrypublications and brokers.  These quotesare compared to the contract price of the swap, which approximates the gain orloss that would have been realized if the contracts had been closed out at March 31,2009.  For positions where independentquotations are not available, an estimate is provided, or the prevailing marketprice at which the positions could be liquidated is used.  All hedge positions offset physical exposuresto the spot market; none of these offsetting physical exposures are included inthe above table.  Price-risksensitivities were calculated by assuming an across-the-board 10% increase inprice regardless of term or historical relationships between the contractualprice of the instruments and the underlying commodity price.  In the event of an actual 10% change inprompt month prices, the fair value of our derivative portfolio would typicallychange less than that shown in the table due to lower volatility in out-monthprices.  We have a daily marginrequirement to maintain a cash deposit with our broker based on the prior day’smarket results on open futures contracts. The balance of this deposit will fluctuate based on our open marketpositions and the commodity exchange’s requirements.  The required brokerage margin balance was$13.2 million at March 31, 2009.

 

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We are exposed to creditloss in the event of nonperformance by counterparties of futures contracts,forward contracts and swap agreements. We anticipate some nonperformance by some of these counterparties which,in the aggregate, we do not believe at this time will have a material adverseeffect on our financial condition results of operations or cash available fordistribution to our unitholders.  Futurescontracts, the primary derivative instrument utilized, are traded on regulatedexchanges, greatly reducing potential credit risks.  Exposure on swap and certain optionagreements is limited to the amount of the recorded fair value as of thebalance sheet dates.  We utilizeprimarily one clearing broker, a major financial institution, for all NYMEXderivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is displayed on a net basis.

 

**Item 4.        Controlsand Procedures**

 

***Disclosure Controls and Procedures***

*** ***

We maintain disclosurecontrols and procedures that are designed to ensure that the informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms and that information is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.  Under the supervision and with theparticipation of our principal executive officer and principal financialofficer, management evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) or 15d-15(e) of theExchange Act).  Based on that evaluation,our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures were effective as of March 31,2009.

 

***Internal Control over Financial Reporting***

*** ***

Therehas not been any change in our internal control over financial reporting thatoccurred during the quarter ended March 31, 2009 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.        LegalProceedings**

 

***General***

*** ***

Although we may, from timeto time, be involved in litigation and claims arising out of our operations inthe normal course of business, we do not believe that we are a party to anylitigation that will have a material adverse impact on our financial conditionor results of operations.  Except asdescribed in our Annual Report on Form 10-K for the year endedDecember 31, 2008 and in Note 11 in this Quarterly Report onForm 10-Q, we are not aware of any significant legal or governmental proceedingsagainst us, or contemplated to be brought against us.  We maintain insurance policies with insurersin amounts and with coverage and deductibles as our general partner believesare reasonable and prudent.  However, wecan provide no assurance that this insurance will be adequate to protect usfrom all material expenses related to potential future claims or that theselevels of insurance will be available in the future at economically acceptableprices.

 

**Item 1A.     RiskFactors**

 

There have been no materialchanges to the Risk Factors disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Item 6.        Exhibits**

 
| 3.1    |   | — |   | Second Amended and  Restated Agreement of Limited Partnership of Global Partners LP dated as of  May 9, 2007 (incorporated herein by reference to Exhibit 3.1 to the  Current Report on Form 8-K filed on May 10, 2007).                             |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                     |
| 3.2    |   | — |   | Amendment No. 1 to  the Second Amended and Restated Agreement of Limited Partnership of Global  Partners LP dated April 14, 2008 (incorporated herein by reference to  Exhibit 3.1 to the Current Report on Form 8-K filed on  April 17, 2008). |
|   |   |   |   |                                                                                                                                                                                                                                                                     |
| 31.1   |   | — |   | Rule 13a-14(a)/15d-14(a) Certification  of Principal Executive Officer of Global GP LLC, general partner of Global  Partners LP.                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                     |
| 31.2   |   | — |   | Rule 13a-14(a)/15d-14(a) Certification  of Principal Financial Officer of Global GP LLC, general partner of Global  Partners LP.                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                     |
| 32.1   | † | — |   | Section 1350  Certification of Chief Executive Officer of Global GP LLC, general partner of  Global Partners LP.                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                     |
| 32.2   | † | — |   | Section 1350  Certification of Chief Financial Officer of Global GP LLC, general partner of  Global Partners LP.                                                                                                                                                    |

 

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**†****                     **Not deemed “filed” for purposes ofSection 18 of the Securities Exchange Act of 1934 or otherwise subject tothe liability of that section.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                          | **GLOBAL  PARTNERS LP** |           |
|-------------------------------|-------------------------|----------------|
|                          | By:                     | Global GP LLC, |   |
|                          |                    |           | its general partner |
|                          |                    |           |   |
|                          |                    |           |   |
| Dated:  May 8, 2009 |                    | By:            | /s/ Eric Slifka |   |   |
|                          |                    |           | Eric Slifka |   |
|                          |                    |           |   | President and Chief  Executive Officer |
|                          |                    |           |   | (Principal Executive  Officer) |
|                          |                    |           |   |
|                          |                    |           |   |
| Dated:  May 8, 2009 |                    | By:            | /s/ Thomas J. Hollister |   |   |
|                          |                    |           | Thomas J. Hollister |   |
|                          |                    |           |   | Chief Operating Officer  and Chief Financial Officer |
|                          |                    |           |   | (Principal Financial  Officer) |
|                               |                         |                |  |  |  |  |  |  |  |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** |   |   | **Description** |
|---------------------|--------|--------|-----------------|
|                |   |   |            |   |
| 3.1                 |   | — |            | Second  Amended and Restated Agreement of Limited Partnership of Global Partners LP  dated as of May 9, 2007 (incorporated herein by reference to  Exhibit 3.1 to the Current Report on Form 8-K filed on May 10,  2007). |
|                |   |   |            |   |
| 3.2                 |   | — |            | Amendment  No. 1 to the Second Amended and Restated Agreement of Limited  Partnership of Global Partners LP dated April 14, 2008 (incorporated  herein by reference to Exhibit 3.1 to the Current Report on  Form 8-K filed on April 17, 2008). |
|                |   |   |            |   |
| 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 Actof 1934 or otherwise subject to the liability of that section.

 

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