** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **Q**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                        | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                    | ** ** |
| ** ** | ** ** | **For the quarterly period ended September 30, 2010**                                                                                                                                                    | ** ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                    | ** ** |
| ** ** | ** ** | **OR**                                                                                                                                                                                                        | ** ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                    | ** ** |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                       | ** ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                    | ** ** |
| ** ** | ** ** | **For the transition period  from              to              ** | ** ** |

 

**Commission file number****001-32593**

 

**GlobalPartners LP**

(Exact name of registrant as specified in itscharter)

 

| **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 executive offices,including zip code)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                                                                              Yesý No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files.                                                            Yeso 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 (as defined in  Rule 12b-2 of the Exchange Act). |   | Yes o No ý |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|                                                                                                                    |   |            |
| The  issuer had 11,338,139 common units and 5,642,424 subordinated units  outstanding as of November 1, 2010.      |

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I.         FINANCIAL  INFORMATION**                                                     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                  |       |
| **Item 1.       Financial Statements**                                                                        | 1          |
| ** **                                                                                                                                  |       |
| Consolidated  Balance Sheets as of September 30, 2010 and December 31, 2009                                                       | 1          |
|                                                                                                                                        |       |
| Consolidated Statements  of Income for the three and nine months ended September 30, 2010 and  2009                                    | 2          |
|                                                                                                                                        |       |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2010 and  2009                                          | 3          |
|                                                                                                                                        |       |
| Consolidated  Statements of Partners’ Equity for the nine months ended September 30,  2010                                        | 4          |
|                                                                                                                                        |       |
| Notes to  Consolidated Financial Statements                                                                                                 | 5          |
|                                                                                                                                        |       |
| **Item 2.       Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 33         |
| ** **                                                                                                                                  |       |
| **Item 3.       Quantitative and Qualitative  Disclosures about Market Risk**                                 | 54         |
| ** **                                                                                                                                  |       |
| **Item 4.       Controls and Procedures**                                                                     | 56         |
| ** **                                                                                                                                  |       |
| **PART II. OTHER  INFORMATION**                                                                                                        | 57         |
| ** **                                                                                                                                  |       |
| **Item 1.       Legal Proceedings**                                                                           | 57         |
| ** **                                                                                                                                  |       |
| **Item 1A.    Risk Factors**                                                                                                 | 57         |
| ** **                                                                                                                                  |       |
| **Item 6.       Exhibits**                                                                                    | 60         |
| ** **                                                                                                                                  |       |
| **SIGNATURES**                                                                                                                              | 61         |
| ** **                                                                                                                                  |       |
| **INDEX TO EXHIBITS**                                                                                                                       | 62         |

** **

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**Item 1.    Financial Statements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

** **

** **
| ** **                                                                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                     |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                      | 4,592      |                  | $          | 662 |   |
| Accounts receivable, net                                                                                                                                                            |       | 304,007                |       | 335,912               |       |
| Accounts receivable—affiliates                                                                                                                                                 |       | 1,313                  |       | 1,565                 |       |
| Inventories                                                                                                                                                                         |       | 531,782                |       | 465,923               |       |
| Brokerage margin deposits                                                                                                                                                           |       | 10,493                 |       | 18,059                |       |
| Fair value of forward fixed price contracts                                                                                                                                         |       | 13,268                 |       | 3,089                 |       |
| Prepaid expenses and other current assets                                                                                                                                           |       | 56,640                 |       | 37,648                |       |
| Total current assets                                                                                                                                                                |       | 922,095                |       | 862,858               |       |
|                                                                                                                                                                                |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                         |       | 417,019                |       | 159,292               |       |
| Intangible assets, net                                                                                                                                                              |       | 45,461                 |       | 28,557                |       |
| Other assets                                                                                                                                                                        |       | 12,630                 |       | 1,996                 |       |
| Total assets                                                                                                                                                                        |       | $                      | 1,397,205  |                  | $          | 1,052,703 |   |
| ** **                                                                                                                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Liabilities and partners’  equity**                                                                                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                    |       | $                      | 243,415    |                  | $          | 243,449 |   |
| Working capital revolving credit facility—current  portion                                                                                                                     |       | 185,273                |       | 221,711               |       |
| Environmental liabilities—current portion                                                                                                                                      |       | 5,684                  |       | 3,296                 |       |
| Accrued expenses and other current liabilities                                                                                                                                      |       | 78,088                 |       | 77,604                |       |
| Income taxes payable                                                                                                                                                                |       | —                 |       | 461                   |       |
| Obligations on forward fixed price contracts and  other derivatives                                                                                                                 |       | 21,414                 |       | 21,114                |       |
| Total current liabilities                                                                                                                                                           |       | 533,874                |       | 567,635               |       |
|                                                                                                                                                                                |       |                   |       |                  |       |
| Working capital revolving credit facility—less current  portion                                                                                                                |       | 280,427                |       | 240,889               |       |
| Revolving credit facility                                                                                                                                                           |       | 300,000                |       | 71,200                |       |
| Environmental liabilities—less current portion                                                                                                                                 |       | 31,199                 |       | 2,254                 |       |
| Accrued pension benefit cost                                                                                                                                                        |       | 1,657                  |       | 2,751                 |       |
| Deferred compensation                                                                                                                                                               |       | 2,156                  |       | 1,840                 |       |
| Other long-term liabilities                                                                                                                                                         |       | 19,298                 |       | 8,714                 |       |
| Total liabilities                                                                                                                                                                   |       | 1,168,611              |       | 895,283               |       |
|                                                                                                                                                                                |       |                   |       |                  |       |
| **Partners’ equity**                                                                                                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| Common unitholders (11,338,139 units issued and  11,291,312 outstanding at September 30, 2010 and 7,428,139 units issued  and 7,380,996 outstanding at December 31, 2009) |       | 247,060                |       | 165,129               |       |
| Subordinated unitholders (5,642,424 units issued  and outstanding at September 30, 2010 and December 31, 2009)                                                            |       | (675                   | )          | (713                  | )          |
| General partner interest (230,303 equivalent units  outstanding at September 30, 2010 and December 31, 2009)                                                              |       | (27                    | )          | (29                   | )          |
| Accumulated other comprehensive loss                                                                                                                                                |       | (17,764                | )          | (6,967                | )          |
| Total partners’ equity                                                                                                                                                         |       | 228,594                |       | 157,420               |       |
| Total liabilities and partners’ equity                                                                                                                                         |       | $                      | 1,397,205  |                  | $          | 1,052,703 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

1

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Inthousands, except per unit data)**

**(Unaudited)**

 

 
| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                                                                         |       | $                                                    | 1,546,839  |                                                | $          | 1,285,331 |   | $ | 5,046,285 |   | $ | 4,119,435 |   |
| Cost of sales                                                                                 |       | 1,511,744                                            |       | 1,256,058                                           |       | 4,931,461 |   | 4,011,659 |   |
| Gross profit                                                                                  |       | 35,095                                               |       | 29,273                                              |       | 114,824 |   | 107,776 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and operating expenses:                                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Selling, general and administrative expenses                                                  |       | 17,246                                               |       | 13,859                                              |       | 47,715 |   | 45,233 |   |
| Operating expenses                                                                            |       | 10,405                                               |       | 8,666                                               |       | 28,867 |   | 26,278 |   |
| Amortization expenses                                                                         |       | 1,005                                                |       | 747                                                 |       | 2,430 |   | 2,350 |   |
| Total costs and operating expenses                                                            |       | 28,656                                               |       | 23,272                                              |       | 79,012 |   | 73,861 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income                                                                              |       | 6,439                                                |       | 6,001                                               |       | 35,812 |   | 33,915 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                                                              |       | (5,888                                               | )          | (3,742                                              | )          | (14,326 | ) | (10,940 | ) |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Income before income tax expense                                                              |       | 551                                                  |       | 2,259                                               |       | 21,486 |   | 22,975 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense                                                                            |       | —                                               |       | (200                                                | )          | (387 | ) | (1,075 | ) |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                                    |       | 551                                                  |       | 2,059                                               |       | 21,099 |   | 21,900 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Less: General partner’s interest in net income,  including incentive distribution rights |       | (72                                                  | )          | (86                                                 | )          | (518 | ) | (529 | ) |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Limited partners’ interest in net income                                                 |       | $                                                    | 479        |                                                | $          | 1,973 |   | $ | 20,581 |   | $ | 21,371 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic net income per limited partner unit                                                     |       | $                                                    | 0.03       |                                                | $          | 0.15 |   | $ | 1.30 |   | $ | 1.64 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted net income per limited partner unit                                                   |       | $                                                    | 0.03       |                                                | $          | 0.15 |   | $ | 1.28 |   | $ | 1.60 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic weighted average limited partner units  outstanding                                     |       | 16,934                                               |       | 12,979                                              |       | 15,824 |   | 13,037 |   |
|                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted weighted average limited partner units  outstanding                                   |       | 17,180                                               |       | 13,304                                              |       | 16,075 |   | 13,334 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

2

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 

 
| ** **                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                                    |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 21,099     |   | $ | 21,900 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                |       | 12,733                                              |       | 11,149 |   |
| Amortization of deferred financing fees                                                      |       | 1,928                                               |       | 868 |   |
| Disposition of property and equipment and other                                              |       | (8                                                  | )          | 1 |   |
| Bad debt expense                                                                             |       | 370                                                 |       | 1,520 |   |
| Stock-based compensation expense                                                             |       | 76                                                  |       | 1,580 |   |
| Changes in operating assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                          |       | 31,535                                              |       | 52,354 |   |
| Accounts receivable — affiliate                                                         |       | 252                                                 |       | (2,203 | ) |
| Inventories                                                                                  |       | (65,859                                             | )          | (179,955 | ) |
| Broker margin deposits                                                                       |       | 7,566                                               |       | 8,986 |   |
| Prepaid expenses, all other current assets and  other assets                                 |       | (30,738                                             | )          | (7,673 | ) |
| Accounts payable                                                                             |       | (34                                                 | )          | (54,037 | ) |
| Income taxes payable                                                                         |       | (1,356                                              | )          | (471 | ) |
| Change in fair value of forward fixed price  contracts                                       |       | (9,880                                              | )          | 162,024 |   |
| Accrued expenses, all other current liabilities  and other long-term liabilities             |       | (642                                                | )          | 9,735 |   |
| Net cash (used in) provided by operating  activities                                         |       | (32,958                                             | )          | 25,778 |   |
|                                                                                         |       |                                                |       |   |   |
| **Cash flows from investing  activities**                                                    |       |                                                |       |   |   |
| Acquisitions                                                                                 |       | (248,359                                            | )          | — |   |
| Capital expenditures                                                                         |       | (7,544                                              | )          | (8,024 | ) |
| Proceeds from sale of property and equipment                                                 |       | 47                                                  |       | 2 |   |
| Net cash used in investing activities                                                        |       | (255,856                                            | )          | (8,022 | ) |
|                                                                                         |       |                                                |       |   |   |
| **Cash flows from financing  activities**                                                    |       |                                                |       |   |   |
| Proceeds from public offering, net                                                           |       | 84,584                                              |       | — |   |
| Borrowings from credit facilities, net                                                       |       | 231,900                                             |       | 5,400 |   |
| Repurchase of common units                                                                   |       | —                                              |       | (3,464 | ) |
| Repurchased units withheld for tax obligations                                               |       | (404                                                | )          | (386 | ) |
| Distributions to partners                                                                    |       | (23,336                                             | )          | (19,567 | ) |
| Net cash provided by (used in) financing  activities                                         |       | 292,744                                             |       | (18,017 | ) |
|                                                                                         |       |                                                |       |   |   |
| Increase (decrease) in cash and cash equivalents                                             |       | 3,930                                               |       | (261 | ) |
| Cash and cash equivalents at beginning of period                                             |       | 662                                                 |       | 945 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                   | 4,592      |   | $ | 684 |   |
|                                                                                         |       |                                                |       |   |   |
| **Supplemental information**                                                                 |       |                                                |       |   |   |
| Cash paid during the period for interest                                                     |       | $                                                   | 14,017     |   | $ | 10,997 |   |

 

The accompanying notes are an integral partof these consolidated financialstatements.

 

3

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**GLOBALPARTNERS LP**

**CONSOLIDATEDSTATEMENTS OF PARTNERS’ EQUITY**

**(Inthousands)**

**(Unaudited)**

 

 
| ** **                                                               | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                               | ** ** | ** **      | ** ** | ** **       | ** ** | **General**  | ** ** | **Other**         | ** ** | **Total**          | ** ** |
| ** **                                                               | ** ** | **Common**      | ** ** | **Subordinated** | ** ** | **Partner**  | ** ** | **Comprehensive** | ** ** | **Partners’** | ** ** |
| ** **                                                               | ** ** | **Unitholders** | ** ** | **Unitholders**  | ** ** | **Interest** | ** ** | **Loss**          | ** ** | **Equity**         | ** ** |
|                                                                     |       |            |       |             |       |         |       |              |       |               |       |
| **Balance at December 31,  2009**                                   |       | $               | 165,129    |             | $          | (713         | )          | $                 | (29        | )                  | $          | (6,967 | ) | $ | 157,420 |   |
| Proceeds from public offering, net                                       |       | 84,584          |       | —           |       | —       |       | —            |       | 84,584             |       |
| Stock-based compensation                                                 |       | 76              |       | —           |       | —       |       | —            |       | 76                 |       |
| Distributions to partners                                                |       | (14,567         | )          | (8,253           | )          | (516         | )          | —            |       | (23,336            | )          |
| Phantom unit dividends                                                   |       | (48             | )          | —           |       | —       |       | —            |       | (48                | )          |
| Repurchased units withheld for tax obligations                           |       | (404            | )          | —           |       | —       |       | —            |       | (404               | )          |
| Comprehensive income:                                                    |       |            |       |             |       |         | ** ** | ** **        |       |               |       |
| Net income                                                               |       | 12,290          |       | 8,291            |       | 518          |       | —            |       | 21,099             |       |
| Other comprehensive income:                                              |       |            |       |             |       |         | ** ** | ** **        |       |               |       |
| Change in fair value of interest rate collars and  forward starting swap |       | —          |       | —           |       | —       |       | (10,885           | )          | (10,885            | )          |
| Change in pension liability                                              |       | —          |       | —           |       | —       |       | 88                |       | 88                 |       |
| Total comprehensive income                                               |       | —          |       | —           |       | —       |       | —            |       | 10,302             |       |
| **Balance at September 30,  2010**                                  |       | $               | 247,060    |             | $          | (675         | )          | $                 | (27        | )                  | $          | (17,764 | ) | $ | 228,594 |   |

 

The accompanying notes are an integral partof these consolidated financialstatements.

 

4

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 1.****                     ****Organization and Basis of Presentation**

 

**Organization and Recent Events**

 

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.  The Partnership also receivesrevenue from retail sales of gasoline, convenience store sales and rentalincome from gasoline stations.

 

The Partnership has fiveoperating subsidiaries:  Global Companies** **LLC, its subsidiary, Glen Hes Corp., Global MontelloGroup Corp., Chelsea Sandwich** **LLC andGlobal Energy Marketing** **LLC (“GlobalEnergy”) (the five operating subsidiaries, collectively, the “Companies”).  The Companies (other than Glen Hes Corp.) arewholly owned by Global Operating** **LLC, awholly owned subsidiary of the Partnership. Global Energy was formed to conduct the Partnership’s natural gasoperations.  It commenced operations in January 2010after obtaining the necessary licensure. 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.

 

OnSeptember 30, 2010, the Partnership completed its acquisition of retailgas stations and supply rights for cash consideration of approximately$202.3 million, plus the assumption of certain environmentalliabilities.  SeeNote 11 and Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Acquisition” for additional informationrelated to the acquisition.

 

OnMarch 19, 2010,the Partnership completed a public offering of 3,910,000 common units at aprice of $22.75 per common unit.  Netproceeds were approximately $84.6 million, after deducting approximately $4.4 million in underwriting fees and offering expenses.  The Partnership used the net proceeds toreduce indebtedness under its senior secured credit agreement.  See Note 15 for additional information related to the public offering.

 

ThePartnership’s 1.34% general partner interest (reduced from 1.73% following thePartnership’s public offering discussed above and in Note 15) is held byGlobal** **GP** **LLC,the Partnership’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.  As of September 30,2010, affiliates of the General Partner, including its directors and executiveofficers, own 241,141 common units and 5,642,424 subordinated units, representinga combined 34.2% limited partner interest.

 

**Basis of Presentation**

 

*Interim Financial Statements*

 

The accompanying consolidated financial statementsas of September 30, 2010 andDecember 31, 2009 and for thethree and nine months ended September 30,2010 and 2009 reflect the accounts of the Partnership.  All intercompany balances and transactionshave been eliminated.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”)and reflect all adjustments (consisting 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, 2009 andnotes thereto contained in the Partnership’s Annual Report on Form** **10-K.  The significant accounting policies describedin Note 2, “Summary of Significant Accounting Policies,” of such AnnualReport on Form 10-K are the same used in preparing the accompanyingconsolidated financial statements.

 

5

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 1.****                     ****Organization and Basis of Presentation (continued)**

 

The results of operations for the three and ninemonths ended September** **30,2010 are not necessarily indicative of the results of operations that will berealized for the entire year ending December** **31, 2010.  Theconsolidated balance sheet at December** **31,2009 has been derived from the audited consolidated financial statements andfootnotes thereto included in the Partnership’s Annual Report on Form** **10-K for theyear ended December 31, 2009.

 

Asdemand for some of the Partnership’s refined petroleum products, specificallyhome heating oil and residual oil for space heating purposes, is generallygreater during the winter months, sales are generally higher during the firstand fourth quarters of the calendar year which may result in significantfluctuations in the Partnership’s quarterly operating results.

 

Thefollowing table presents the Partnership’s products as a percentage of totalsales for the periods presented:

 

| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gasoline sales                                           |       | 69                                                   | %          |                                                | 68         | % |   | 58 | % |   | 51 | % |   |
| Distillate sales: home heating oil, diesel and  kerosene |       | 26                                                   | %          |                                                | 27         | % |   | 37 | % |   | 44 | % |   |
| Residual oil sales                                       |       | 5                                                    | %          |                                                | 5          | % |   | 5 | % |   | 5 | % |   |
|                                                     |       | 100                                                  | %          |                                                | 100        | % |   | 100 | % |   | 100 | % |   |

 

ThePartnership had one customer, ExxonMobil Oil Corporation (“ExxonMobil”), whoaccounted for approximately 22% and 27% of total sales for the three monthsended September 30, 2010, and2009, respectively and approximately 20% and 22% of total sales for the ninemonths ended September 30, 2010and 2009, respectively.

 

**Note 2.****                     ****Net Income Per Limited Partner Unit**

 

Underthe Partnership’s partnership agreement, for any quarterly period, theincentive distribution rights (“IDRs”) participate in net income only to theextent of the amount of cash distributions actually declared, thereby excludingthe IDRs from participating in the Partnership’s undistributed net income orlosses.  Accordingly, the Partnership’sundistributed net income is assumed to be allocated to the common andsubordinated unitholders, or limited partners’ interest, and to the GeneralPartner’s general partner interest.

 

OnApril 21, 2010, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit for the period fromJanuary 1, 2010 through March 31, 2010.  On July 21, 2010, the board declared aquarterly cash distribution of $0.4875 per unit for the period fromApril 1, 2010 through June 30, 2010. On October 20, 2010, the board declared a quarterly cashdistribution of $0.4950 per unit for the period from July 1, 2010 throughSeptember 30, 2010.  These declaredcash distributions resulted in incentive distributions to the General Partner,as the holder of the IDRs, and enabled the Partnership to exceed its firsttarget distribution with respect to such IDRs. See Note 9, “Cash Distributions” for further information.

 

6

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

Thefollowing table provides a reconciliation of net income and the assumedallocation of net income to the limited partners’ interest for purposes ofcomputing net income per limited partner unit for the three and nine monthsended September 30, 2010 and 2009 (in thousands, except per unit data):

 
| ** **                                                     | ** ** | **Three Months Ended September 30, 2010** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                         | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                                                         | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                                 | ** ** | **Total**                                                          | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income (1)                                                 |       | $                                                                  | 551        |   | $ | 479 |   | $ | 72 |   | $ | — |   |
|                                                           |       |                                                               |       |   |   |   |   |   |   |
| Declared distribution                                          |       | $                                                                  | 8,603      |   | $ | 8,405 |   | $ | 114 |   | $ | 84 |   |
| Assumed allocation of undistributed net income                 |       | (8,052                                                             | )          | (7,926 | ) | (126 | ) | — |   |
| Assumed allocation of net income                               |       | $                                                                  | 551        |   | $ | 479 |   | $ | (12 | ) | $ | 84 |   |
|                                                           |       |                                                               |       |   |   |   |   |   |   |
| **Denominator:**                                               |       |                                                               |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding(2)   |       |                                                               |       | 16,934 |   |   |   |   |   |
| Dilutive effect of phantom units                               |       |                                                               |       | 246 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding(2) |       |                                                               |       | 17,180 |   |   |   |   |   |
|                                                           |       |                                                               |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                      |       |                                                               |       | $ | 0.03 |   |   |   |   |   |
| Diluted net income per limited partner unit                    |       |                                                               |       | $ | 0.03 |   |   |   |   |   |

 
| ** **                                                  | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                         | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **                                                         | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                              | ** ** | **Total**                                                          | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income(1)                                               |       | $                                                                  | 2,059      |   | $ | 1,973 |   | $ | 86 |   | $ | — |   |
|                                                        |       |                                                               |       |   |   |   |   |   |   |
| Declared distribution                                       |       | $                                                                  | 6,483      |   | $ | 6,321 |   | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income              |       | (4,424                                                             | )          | (4,348 | ) | (76 | ) | — |   |
| Assumed allocation of net income                            |       | $                                                                  | 2,059      |   | $ | 1,973 |   | $ | 36 |   | $ | 50 |   |
|                                                        |       |                                                               |       |   |   |   |   |   |   |
| **Denominator:**                                            |       |                                                               |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding   |       |                                                               |       | 12,979 |   |   |   |   |   |
| Dilutive effect of phantom units                            |       |                                                               |       | 325 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding |       |                                                               |       | 13,304 |   |   |   |   |   |
|                                                        |       |                                                               |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                   |       |                                                               |       | $ | 0.15 |   |   |   |   |   |
| Diluted net income per limited partner unit                 |       |                                                               |       | $ | 0.15 |   |   |   |   |   |

 

7

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 
| ** **                                                     | ** ** | **Nine Months Ended September 30, 2010** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                        | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                                                        | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                                 | ** ** | **Total**                                                         | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income(1)                                                  |       | $                                                                 | 21,099     |   | $ | 20,581 |   | $ | 518 |   | $ | — |   |
|                                                           |       |                                                              |       |   |   |   |   |   |   |
| Declared distribution                                          |       | $                                                                 | 25,513     |   | $ | 24,961 |   | $ | 338 |   | $ | 214 |   |
| Assumed allocation of undistributed net income                 |       | (4,414                                                            | )          | (4,380 | ) | (34 | ) | — |   |
| Assumed allocation of net income                               |       | $                                                                 | 21,099     |   | $ | 20,581 |   | $ | 304 |   | $ | 214 |   |
|                                                           |       |                                                              |       |   |   |   |   |   |   |
| **Denominator:**                                               |       |                                                              |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding(2)   |       |                                                              |       | 15,824 |   |   |   |   |   |
| Dilutive effect of phantom units                               |       |                                                              |       | 251 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding(2) |       |                                                              |       | 16,075 |   |   |   |   |   |
|                                                           |       |                                                              |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                      |       |                                                              |       | $ | 1.30 |   |   |   |   |   |
| Diluted net income per limited partner unit                    |       |                                                              |       | $ | 1.28 |   |   |   |   |   |

 
| ** **                                                  | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                        | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **                                                        | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                              | ** ** | **Total**                                                         | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income(1)                                               |       | $                                                                 | 21,900     |   | $ | 21,371 |   | $ | 529 |   | $ | — |   |
|                                                        |       |                                                              |       |   |   |   |   |   |   |
| Declared distribution                                       |       | $                                                                 | 19,522     |   | $ | 19,036 |   | $ | 336 |   | $ | 150 |   |
| Assumed allocation of undistributed net income              |       | 2,378                                                             |       | 2,335 |   | 43 |   | — |   |
| Assumed allocation of net income                            |       | $                                                                 | 21,900     |   | $ | 21,371 |   | $ | 379 |   | $ | 150 |   |
|                                                        |       |                                                              |       |   |   |   |   |   |   |
| **Denominator:**                                            |       |                                                              |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding   |       |                                                              |       | 13,037 |   |   |   |   |   |
| Dilutive effect of phantom units                            |       |                                                              |       | 297 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding |       |                                                              |       | 13,334 |   |   |   |   |   |
|                                                        |       |                                                              |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                   |       |                                                              |       | $ | 1.64 |   |   |   |   |   |
| Diluted net income per limited partner unit                 |       |                                                              |       | $ | 1.60 |   |   |   |   |   |

 

----

(1)             Calculation includes the effect of thepublic offering on March 19, 2010 (see Note 15) and, as a result, thegeneral partner interest was reduced to 1.34% for the three months endedSeptember 30, 2010 and, based on a weighted average, 1.60% for the ninemonths ended September 30, 2010. For the three and nine months ended September 30, 2009, the generalpartner interest was 1.73%.

(2)             At September 30, 2010, limitedpartner units outstanding excluded common units held on behalf of thePartnership pursuant to its Repurchase Program and for future satisfaction ofthe General Partner’s Obligations (as defined in Note 13).  These units arenot deemed outstanding for purposes of calculating net income per limitedpartner unit (basic and diluted).

 

8

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 3.****                     ****Comprehensive (Loss) Income**

 

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

 

| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                               | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                                               |       | $                                | 551        |                            | $          | 2,059 |   | $ | 21,099 |   | $ | 21,900 |   |
| Change in fair value of interest rate collars and  forward starting swap |       | (3,774                           | )          | (674                            | )          | (10,885 | ) | 2,741 |   |
| Change in pension liability                                              |       | 646                              |       | 696                             |       | 88 |   | 1,047 |   |
| Total comprehensive (loss) income                                        |       | $                                | (2,577     | )                               | $          | 2,081 |   | $ | 10,302 |   | $ | 25,688 |   |

 

**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 ofsales.  All hedged inventory is valuedusing the lower of cost, as determined by specific identification, ormarket.  Prior to sale, hedges areremoved from specific barrels of inventory, and the then unhedged inventory issold and accounted for on a first-in, first-out basis.

 

Inventoriesconsisted of the following (in thousands):

 

| ** **                                         | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Distillates: home heating oil, diesel and kerosene |       | $                            | 366,383    |                        | $          | 339,737 |   |
| Residual oil                                       |       | 51,055                       |       | 39,787                      |       |
| Gasoline                                           |       | 81,484                       |       | 64,645                      |       |
| Blend stock                                        |       | 32,860                       |       | 21,754                      |       |
| Total                                              |       | $                            | 531,782    |                        | $          | 465,923 |   |

 

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 $44.3 million and$22.9 million at September 30, 2010 and December 31, 2009,respectively.  Negative exchange balancesare accounted for as accounts payable and amounted to $41.3 million and$10.2 million at September 30, 2010 and December 31, 2009,respectively.  Exchange transactions arevalued using current quoted market prices.

 

**Note 5.****                     ****Derivative Financial Instruments**

 

Accounting and reporting guidance for derivativeinstruments and hedging activities requires that an entity recognize derivativesas either assets or liabilities on the balance sheet and measure theinstruments at fair value.  Changes inthe fair value of the derivative are to be recognized currently in earnings,unless specific hedge accounting criteria are met.

 

9

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (continued)**

 

The following table presents the volume of activityrelated to the Partnership’s derivative financial instruments at September** **30, 2010:

 

| ** **            | ** ** | **Units(1)** | ** ** | **Unit of Measure** | ** **          |
|-----------------------|------------|--------------|------------|-------------------------------|---------------------|
| Oil Contracts         |       |         |       |                          |                |
| Long                  |       | 15,516       |       | Thousands of barrels          |                |
| Short                 |       | (20,537      | )          | Thousands of barrels          |                |
|                  |       |         |       |                          |                |
| Natural Gas Contracts |       |         |       |                          |                |
| Long                  |       | 21,914       |       | Thousands of decatherms       |                |
| Short                 |       | (21,914      | )          | Thousands of decatherms       |                |
|                  |       |         |       |                          |                |
| Interest Rate Collars |       | $            | 200        |                          | Millions of dollars |   |
|                  |       |         |       |                          |                |
| Forward Starting Swap |       | $            | 100        |                          | Millions of dollars |   |

 

(1)             Number of open positions andgross notional amounts do not quantify risk or represent assets or liabilitiesof the Partnership, but are used in the calculation of cash settlements underthe contracts.

 

***Fair Value Hedges***

 

The fair value of the Partnership’s derivatives isdetermined through the use of independent markets and is based upon theprevailing market prices of such instruments at the date of valuation.  The Partnership enters into futures contractsfor the receipt or delivery of refined petroleum products in futureperiods.  The contracts are entered intoin the normal course of business to reduce risk of loss of inventory on hand,which could result through fluctuations in market prices.  Changes in the fair value of these contracts,as well as the offsetting gain or loss on the hedged inventory item, arerecognized in earnings as an increase or decrease in cost of sales.  Ineffectiveness related to these hedgingactivities was immaterial for the three and nine months ended September** **30, 2010 and 2009.

 

The Partnership also uses futures contracts andswap agreements to hedge exposure under forward purchase and sale commitments.  These agreements are intended to hedge thecost component of virtually all of the Partnership’s forward purchase and salecommitments.  Changes in the fair valueof these contracts, as well as offsetting gains or losses on the forward fixedprice purchase and sale commitments, are recognized in earnings as an increaseor decrease in cost of sales.  Gains andlosses on net product margin from forward fixed price purchase and salecontracts are reflected in earnings as an increase or decrease in cost of salesas these contracts mature. Ineffectiveness related to these hedging activities was immaterial forthe three and nine months ended September 30, 2010 and 2009.

 

10

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (continued)**

 

Thefollowing table presents the gross fair values of the Partnership’s derivativeinstruments and firm commitments and their location in the Partnership’s consolidatedbalance sheets at September 30, 2010 and December 31, 2009 (inthousands):

 
| ** **                                                            | ** ** | ** **              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **Balance Sheet**  | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Asset Derivatives**                                            | ** ** | **Location (Net)** | ** ** | **Fair Value**    | ** ** | **Fair Value**   | ** ** |
|                                                                  |       |                    |       |                   |       |                  |       |
| *Derivatives designated as hedging instruments and  firm commitments* |       |                    |       |                   |       |                  |       |
| Oil  product contracts(1)                                             |       | (2)                     |       | $                      | 5,215      |                  | $          | 4,085 |   |
|                                                                  |       |                    |       |                   |       |                  |       |
| *Derivatives not designated as hedging instruments*                   |       |                    |       |                   |       |                  |       |
| Oil  product and natural gas contracts                                |       | (2)                     |       | 14,510                 |       | 11,067                |       |
|                                                                  |       |                    |       |                   |       |                  |       |
| Total  asset derivatives                                              |       |                    |       | $                      | 19,725     |                  | $          | 15,152 |   |
|                                                                  |       |                    |       |                   |       |                  |       |
| **Liability Derivatives**                                             | ** ** | ** **              | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                  |       |                    |       |                   |       |                  |       |
| *Derivatives designated as hedging instruments and  firm commitments* |       |                    |       |                   |       |                  |       |
| Oil  product contracts(1)                                             |       | (3)                     |       | $                      | 15,089     |                  | $          | 23,030 |   |
|                                                                  |       |                    |       |                   |       |                  |       |
| *Derivatives not designated as hedging instruments*                   |       |                    |       |                   |       |                  |       |
| Oil  product and natural gas contracts                                |       | (3)                     |       | 14,382                 |       | 10,805                |       |
|                                                                  |       |                    |       |                   |       |                  |       |
| Total  liability derivatives                                          |       |                    |       | $                      | 29,471     |                  | $          | 33,835 |   |

 

(1)      Includes forward fixed price purchase andsale contracts as recognized in the Partnership’s consolidated balance sheetsat September 30, 2010 and December 31, 2009.

(2)      Fair value of forward fixed pricecontracts and prepaid expenses and other current assets

(3)      Obligations on forward fixed pricecontracts and other derivatives and accrued expenses and other currentliabilities

 

11

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (continued)**

 

Thefollowing table presents the amount of gains and losses from derivatives involvedin fair value hedging relationships recognized in the Partnership’sconsolidated statements of income for the three and nine months endedSeptember 30, 2010 and 2009 (in thousands):

 
| ** **                    | ** ** | ** **                   | ** ** | **Amount  of Gain (Loss) Recognized in** | ** ** |
|-------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | ** **                   | ** ** | **Income  on Derivatives**               | ** ** |
| ** **                    | ** ** | **Location  of Gain (Loss)** | ** ** | **Three  Months Ended**                  | ** ** | **Nine  Months Ended** | ** ** |
| **Derivatives in Fair Value** | ** ** | **Recognized  in**           | ** ** | **September 30,**                   | ** ** | **September 30,** | ** ** |
| **Hedging Relationships**     | ** ** | **Income  on Derivative**    | ** ** | **2010**                                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
|                          |       |                         |       |                                     |       |   |   |   |   |   |   |
| Oil product contracts         |       | Cost of sales                |       | $                                        | (34,725    | ) | $ | (876 | ) | $ | 7,478 |   | $ | (200,478 | ) |
|                               |            |                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | ** **                   | ** ** | **Amount  of Gain (Loss) Recognized in** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | ** **                   | ** ** | **Income  on Hedged Items**              | ** ** |
| ** **                                     | ** ** | **Location  of Gain (Loss)** | ** ** | **Three  Months Ended**                  | ** ** | **Nine  Months Ended** | ** ** |
| **Hedged Items in Fair Value**                 | ** ** | **Recognized  in**           | ** ** | **September 30,**                   | ** ** | **September 30,** | ** ** |
| **Hedged Relationships**                       | ** ** | **Income  on Hedged Items**  | ** ** | **2010**                                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                         |       |                                     |       |   |   |   |   |   |   |
| Inventories and forward  fixed price contracts |       | Cost of sales                |       | $                                        | 34,811     |   | $ | 879 |   | $ | (7,494 | ) | $ | 201,126 |   |
|                                                |            |                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

ThePartnership’s derivative financial instruments do not contain credit riskrelated or other contingent features that could cause accelerated payments whenthese financial instruments are in net liability positions.

 

Thetable below presents the composition and fair value of forward fixed pricepurchase and sale contracts on the Partnership’s consolidated balance sheetbeing hedged by the following derivative instruments (in thousands):

 

| ** **           | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| Futures contracts    |       | $                            | (7,443     | )                           | $          | (14,605 | ) |
| Swaps and other, net |       | (703                         | )          | (3,420                      | )          |
| Total                |       | $                            | (8,146     | )                           | $          | (18,025 | ) |

 

The total balances of $8.1 million and$18.0 million reflect the fair value of the forward fixed price contractliability net of the corresponding asset in the accompanying consolidatedbalance sheets at September 30, 2010 and December 31, 2009,respectively.

 

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 quarterlybasis.  This process includes specificidentification of the hedging instrument and the hedged transaction, the natureof the risk being hedged and how the hedging instrument’s effectiveness will beassessed.  Both at the inception of thehedge and on an ongoing basis, the Partnership assesses whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair value of hedged items. The derivative instruments that qualify for hedge accounting are fairvalue hedges.

 

The Partnership also markets and sells naturalgas.  The Partnership generally conductsbusiness by entering into forward purchase commitments for natural gas onlywhen it simultaneously enters into arrangements for the sale of product forphysical delivery to third-party users. The Partnership generally takes delivery under its purchase commitmentsat the same location as it delivers to third-party users.  Through these transactions, which establishan immediate margin, the Partnership seeks to maintain a position that issubstantially balanced between firm forward purchase and salescommitments.  Natural gas is generallypurchased 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.

 

12

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (continued)**

 

ThePartnership has a daily margin requirement with its broker based on the priorday’s market results on open futures contracts. The brokerage margin balance was $10.5 million and$18.1 million at September 30, 2010 and December 31, 2009,respectively.

 

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 in 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.

 

ThePartnership generally enters into master netting arrangements to mitigatecounterparty credit risk with respect to its derivatives.  Master netting arrangements are standardizedcontracts that govern all specified transactions with the same counterparty andallow the Partnership to terminate all contracts upon occurrence of certainevents, such as a counterparty’s default or bankruptcy.  Because these arrangements provide the rightof offset, and the Partnership’s intent and practice is to offset amounts inthe case of contract terminations, the Partnership records fair value ofderivative positions on a net basis.

 

***Cash Flow Hedges***

 

The Partnership links all hedgesthat are designated as cash flow hedges to forecasted transactions.  To the extent such hedges are effective, thechanges in the fair value of the derivative instrument are reported as acomponent of other comprehensive income and reclassified into interest expensein 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 and accounted foras a cash flow hedge.  The first collar,which became effective on May 14,2007 and expires on May 14,2011, is used to hedge the variability in interest payments due to changes inthe three-month LIBOR rate with respect to $100.0 million of three-month LIBOR-based borrowings.  Under the first collar, the Partnershipcapped its exposure at a maximum three-month LIBOR rate of 5.75% andestablished a minimum floor rate of 3.75%. As of September 30, 2010, thethree-month LIBOR rate of 0.38% was lower than the floor rate.  As a result, in October 2010, thePartnership remitted to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$431,000 and, at September 30, 2010, such amount was recorded in accrued expensesand other current liabilities in the accompanying consolidated balancesheets.  Thefair values of the first collar, excluding accrued interest, were liabilitiesof approximately $2.1 millionand $3.9 millionas of September 30,2010 and December 31,2009, respectively, and were recorded in both other long-term liabilities andaccumulated other comprehensive income. Hedge effectiveness was assessed at inception and is assessed quarterly,prospectively and retrospectively.  The changes in the fair value of the firstcollar are expected to be highly effective in offsetting the changes ininterest rate payments attributable to fluctuations in the three-month LIBORrate above and below the first collar’s strike rates.

 

13

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (continued)**

 

On September 29, 2008, the Partnership executed its second zero premiuminterest 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 established a minimum floor rate of2.70%.  As of September 30, 2010, the one-month LIBOR rate of 0.26% was lowerthan the floor rate.  As a result, in October 2010,the Partnership remitted to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$197,000 and, at September 30, 2010, such amount was recorded in accruedexpenses and other current liabilities in the accompanying consolidated balancesheet.  Thefair values of the second collar, excluding accrued interest, were liabilitiesof approximately $5.8 millionand $3.2 millionas of September 30,2010 and December 31,2009, respectively, and were recorded in both other long-term liabilities andaccumulated other comprehensive income in the accompanying consolidated balancesheets.  Hedge effectiveness was assessedat inception and is assessed quarterly, prospectively and retrospectively, usingthe regression analysis.  Thechanges in the fair value of the second collar are expected to be highlyeffective in offsetting the changes in interest rate payments attributable tofluctuations in the one-month LIBOR rate above and below the second collar’sstrike rates.

 

In addition, in October 2009,the Partnership executed a forward starting swap with a major financialinstitution.  The swap, which will becomeeffective on May 16,2011 and expire on May 16,2016, will be used to hedge the variability in interest payments due to changesin the one-month LIBOR swap curve with respect to $100.0 million of one-month LIBOR-based borrowings at a fixed rateof 3.93%.  Thefair value of the swap was a liability of approximately $9.9 million as of September 30, 2010 and was recorded in other long-term liabilities inthe accompanying consolidated balance sheets. The fair value of the swap was an asset of approximately $80,000 as ofDecember 31, 2009 and was recorded in other long-term assets in theaccompanying consolidated balance sheets. Hedge effectiveness was assessed at inception and will be assessedquarterly, prospectively and retrospectively, using regression analysis.  The changes in the fairvalue of the swap are expected to be highly effective in offsetting the changesin interest rate payments attributable to fluctuations in the one-month LIBORswap curve.

 

Thefollowing table presents the fair value of the Partnership’s derivativeinstruments and their location in the Partnership’s consolidated balance sheetsat September 30, 2010 and December 31, 2009 (in thousands):

 
| ** **                    | ** ** | ** **                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| **Derivatives Designated as** | ** ** | **Balance  Sheet**          | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Hedging Instruments**       | ** ** | **Location**                | ** ** | **Fair  Value**        | ** ** | **Fair  Value**       | ** ** |
|                          |       |                        |       |                   |       |                  |       |
| *Asset  derivatives*          |       |                        |       |                   |       |                  |       |
| Forward starting swap         |       | Other assets                |       | $                      | —     |                  | $          | 80 |   |
|                          |       |                        |       |                   |       |                  |       |
| *Liability  derivatives*      |       |                        |       |                   |       |                  |       |
| Interest rate collars         |       | Other long-term liabilities |       | $                      | 7,920      |                  | $          | 7,047 |   |
| Forward starting swap         |       | Other long-term liabilities |       | 9,931                  |       | —                |       |
| Total liability derivatives   |       |                        |       | $                      | 17,851     |                  | $          | 7,047 |   |

 

14

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 5.****                     ****Derivative Financial Instruments (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 and partners’ equity for the three and ninemonths ended September 30, 2010 and 2009 (in thousands):

 
| ** **               | ** ** | ** **                 | ** ** | ** **                    | ** ** | **Recognized  in Income**  | ** ** | ** **                    | ** ** | ** ** | ** ** | **Recognized  in Income** | ** ** |
|--------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|------------|------------|---------------------------|------------|
| ** **               | ** ** | ** **                 | ** ** | ** **                    | ** ** | **on  Derivatives**        | ** ** | ** **                    | ** ** | ** ** | ** ** | **on  Derivatives**       | ** ** |
| ** **               | ** ** | **Amount  of Gain (Loss)** | ** ** | **(Ineffectiveness  Portion** | ** ** | **Amount  of Gain (Loss)** | ** ** | **(Ineffectiveness  Portion** | ** ** |
| ** **               | ** ** | **Recognized  in Other**   | ** ** | **and  Amount Excluded**      | ** ** | **Recognized  in Other**   | ** ** | **and  Amount Excluded**      | ** ** |
| ** **               | ** ** | **Comprehensive  Income**  | ** ** | **from  Effectiveness**       | ** ** | **Comprehensive  Income**  | ** ** | **from  Effectiveness**       | ** ** |
| ** **               | ** ** | **on  Derivatives**        | ** ** | **Testing)**                  | ** ** | **on  Derivatives**        | ** ** | **Testing)**                  | ** ** |
| **Derivatives in**       | ** ** | **Three  Months Ended**    | ** ** | **Three  Months Ended**       | ** ** | **Nine Months Ended**      | ** ** | **Nine Months Ended**         | ** ** |
| **Cash Flow**            | ** ** | **September 30,**     | ** ** | **September 30,**        | ** ** | **September 30,**     | ** ** | **September 30,**        | ** ** |
| **Hedging Relationship** | ** ** | **2010**                   | ** ** | **2009**                      | ** ** | **2010**                   | ** ** | **2009**                      | ** ** | **2010**   | ** ** | **2009**                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|                     |       |                       |       |                          |       |                       |       |                          |       |       |       |                      |       |   |   |   |   |
| Interest rate collars    |       | $                          | (343       | )                             | $          | (674                       | )          | $                             | —     |       | $          | —                    |       | $ | (872 | ) | $ | 2,741 |   | $ | — |   | $ |  — |   |
| Forward  starting swap   |       | (3,431                     | )          | —                        |       | —                     |       | —                        |       | (10,013    | )          | —                    |       | — |   | — |   |
| Total                    |       | $                          | (3,774     | )                             | $          | (674                       | )          | $                             | —     |       | $          | —                    |       | $ | (10,885 | ) | $ | 2,741 |   | $ | — |   | $ |  — |   |

 

Ineffectiveness related to the interest ratecollars and forward starting swap is recognized as interest expense and wasimmaterial for the three and nine months ended September 30, 2010 and2009.  The effective portion related tothe interest rate collars that was originally reported in other comprehensiveincome and reclassified to earnings was $1.5 million and $1.4 millionfor the three months ended September 30, 2010 and 2009, respectively, and$4.5 million and $3.7 million for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

***Derivatives Not Involved in a Hedging Relationship***

 

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 inherent inthe business, such as weather conditions. In connection with managing these positions and maintaining a constantpresence in the marketplace, both necessary for its business, the Partnershipengages in a controlled trading program for up to an aggregate of 250,000barrels of refined petroleum products at any one point in time.

 

Thefollowing table presents the amount of gains and losses from derivatives notinvolved in a hedging relationship recognized in the Partnership’s consolidatedstatements of income for the three and nine months ended September 30,2010 and 2009 (in thousands):

 
| ** **                        | ** ** | ** **         | ** ** | **Amount  of Gain (Loss)** | ** ** | **Amount  of Gain (Loss)**      | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Location  of**   | ** ** | **Recognized  in Income**  | ** ** | **Recognized  in Income**       | ** ** |
| ** **                        | ** ** | **Gain  (Loss)**   | ** ** | **on  Derivatives**        | ** ** | **on  Derivatives**             | ** ** |
| ** **                        | ** ** | **Recognized  in** | ** ** | **Three  Months Ended**    | ** ** | **Nine Months Ended** | ** ** |
| **Derivatives Not Designated as** | ** ** | **Income  on**     | ** ** | **September 30,**     | ** ** | **September 30,**          | ** ** |
| **Hedging Instruments**           | ** ** | **Derivatives**    | ** ** | **2010**                   | ** ** | **2009**                        | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
|                              |       |               |       |                       |       |                            |       |   |   |   |   |
| Oil  product contracts            |       | Cost of sales      |       | $                          | 1,828      |                            | $          | 2,402 |   | $ | 2,959 |   | $ | 8,154 |   |
|                                   |            |                    |            |                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

15

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 6.****                     ****Debt**

 

OnAugust 18, 2010, the Partnership entered into a First Amendment to Amendedand Restated Credit Agreement which amended the Amended and Restated CreditAgreement dated May 14, 2010 (as amended the “Credit Agreement”).  In accordance with the Credit Agreement andin connection with the acquisition of retail gas stations and supply rightsfrom ExxonMobil (see Note 11), the Partnership requested, and certainlenders under the Credit Agreement agreed to, an increase in the revolvingcredit facility in an amount equal to $200.0 million for a total creditfacility of up to $1.15 billion. The Credit Agreement will mature on May 14, 2014.

 

Thereare two facilities under the Credit Agreement:

 

·              a working capital revolving credit facility to beused for working capital purposes and letters of credit in the principal amountequal to the lesser of the Partnership’s borrowing base and $800.0 million; and

 

·              a $350.0 million revolving credit facility tobe used for acquisitions and general corporate purposes.

 

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 the revolving credit facility, the working capitalrevolving credit facility, or both, by up to another $200.0 million, for atotal credit facility of up to $1.35 billion.  Any such request for an increase by thePartnership must be in a minimum amount of $5.0 million, and the revolvingcredit facility may not be increased by more than $50.0 million.  The Partnership cannot provide assurance,however, that its lending group will agree to fund any request by thePartnership for additional amounts in excess of the total available commitmentsof $1.15 billion.

 

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’s borrowings under theworking capital revolving credit facility cannot exceed the then currentborrowing base.  Availability under thePartnership’s borrowing base may be affected by events beyond the Partnership’scontrol, such as changes in refined petroleum product prices, collectioncycles, counterparty performance, advance rates and limits, and generaleconomic conditions.  These and otherevents could require the Partnership to seek waivers or amendments of covenantsor alternative sources of financing or to reduce expenditures.  The Partnership can provide no assurance thatsuch waivers, amendments or alternative financing could be obtained or, ifobtained, would be on terms acceptable to the Partnership.

 

Duringthe period from January 1, 2009 through May 13, 2010, borrowingsunder the working capital revolving credit facility bore interest at(1) the Eurodollar rate plus 1.75% to 2.25%, (2) the cost of fundsrate plus 1.75% to 2.25%, or (3) the base rate plus 0.75% to 1.25%, eachdepending on the pricing level provided in the previous credit agreement, whichin turn depended upon the Combined Interest Coverage Ratio (as defined in theprevious credit agreement).  Borrowingsunder the revolving credit facility bore interest at (1) the Eurodollarrate plus 2.25% to 2.75%, (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 the pricinglevel provided in the previous credit agreement, which in turn depended uponthe Combined Interest Coverage Ratio under the previous credit agreement.

 

16

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 6.****                     ****Debt (continued)**

 

CommencingMay 14, 2010, borrowings under the working capital revolving creditfacility bear interest at (1) the Eurodollar rate plus 2.50% to 3.00%,(2) the cost of funds rate plus 2.50% to 3.00%, or (3) the base rateplus 1.50% to 2.00%, each depending on the pricing level provided in the CreditAgreement, which in turn depends upon the Utilization Amount (as defined in theCredit Agreement).

 

Duringthe period from May 14, 2010 through September 7, 2010, borrowingsunder the revolving credit facility bore interest at (1) the Eurodollarrate plus 3.00% to 3.25%, (2) the cost of funds rate plus 3.00% to 3.25%,or (3) the base rate plus 2.00% to 2.25%, each depending on the pricing levelprovided in the Credit Agreement, which in turn depended upon the CombinedSenior Secured Leverage Ratio (as defined in the Credit Agreement).  Commencing September 8, 2010, borrowingsunder the revolving credit facility bear interest at (1) the Eurodollarrate plus 3.00% to 3.875%, (2) the cost of funds rate plus 3.00% to3.875%, or (3) the base rate plus 2.00% to 2.875%, each depending on thepricing level provided in the Credit Agreement, which in turn depends upon theCombined Total Leverage Ratio (as defined in the Credit Agreement).

 

Theaverage interest rates for the Credit Agreement were 4.1% and 3.5% for thethree months ended September 30, 2010 and 2009, respectively, and 3.8% and3.7% for the nine months ended September 30, 2010 and 2009, respectively.

 

The Partnership executed two zeropremium interest rate collars and a forward starting swap which are used tohedge the variability in interest payments under the Credit Agreement due tochanges in LIBOR rates.  See Note 5 for additional information on the interest rate collarsand the forward starting swap.

 

ThePartnership incurs a letter of credit fee of 2.50% — 3.00% per annum for eachletter of credit issued.  In addition,the Partnership incurs a commitment fee on the unused portion of each facilityunder the Credit Agreement equal to 0.50% per annum.

 

ThePartnership classifies a portion of its working capital revolving creditfacility as a long-term liability because the Partnership has a multi-year,long-term commitment from its bank group. The long-term portion of the working capital revolving credit facilitywas $280.4 million and $240.9 million at September 30, 2010 andDecember 31, 2009, respectively, representing the amounts expected to beoutstanding during the year.  Inaddition, the Partnership classifies a portion of its working capital revolvingcredit facility as a current liability because it repays amounts outstandingand reborrows funds based on its working capital requirements.  The current portion of the working capital revolvingcredit facility was approximately $185.3 million and $221.7 millionat September 30, 2010 and December 31, 2009, respectively,representing the amounts the Partnership expects to pay down during the courseof the year.

 

Asof September 30, 2010, the Partnership had total borrowings outstandingunder the Credit Agreement of $765.7 million, including$300.0 million outstanding on the revolving credit facility.  In addition, the Partnership had outstandingletters of credit of $46.5 million. Subject to borrowing base limitations, the total remaining availabilityfor borrowings and letters of credit at September 30, 2010 andDecember 31, 2009 was $337.8 million and $211.2 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 as a result thereof, and limitations on thePartnership’s ability to grant liens, make certain loans or investments, incuradditional indebtedness or guarantee other indebtedness, make any materialchange to the nature of the Partnership’s business or undergo a fundamentalchange, make any material dispositions, acquire another company, enter into amerger, consolidation, sale leaseback transaction or purchase of assets, ormake capital expenditures in excess of specified levels.

 

17

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 6.       Debt (continued)**

 

TheCredit Agreement imposes financial covenants that require the Partnership to maintaincertain minimum working capital amounts, capital expenditure limits, a minimumEBITDA, a minimum combined interest coverage ratio, a maximum senior securedleverage ratio and a maximum total leverage ratio.  The Partnership was in compliance with theforegoing covenants at September 30, 2010. The Credit Agreement also contains a representation whereby there can beno event or circumstance, either individually or in the aggregate, that has hador could reasonably be expected to have a Material Adverse Effect (as definedin the Credit Agreement).  Under theCredit Agreement, the clean down requirement of the previous credit agreementwas eliminated.

 

TheCredit Agreement limits distributions by the Partnership to its unitholders tothe amount of the Partnership’s available cash (as defined in its partnershipagreement).

 

Thelending group under the Credit Agreement is comprised of the followinginstitutions: Bank of America, N.A.; JPMorgan Chase Bank, N.A.; WellsFargo Bank, N.A.; Societe Generale; Standard Chartered Bank;RBS Citizens, National Association; BNP Paribas; Cooperative CentraleRaiffeisen-Boerenleenbank B.A., “Radobank Nederland” New York Branch;Sovereign Bank (Santander Group); Credit Agricole Corporate and InvestmentBank; Keybank National Association; Toronto Dominion (New York);RB International Finance (USA) LLC (formerly known asRZB Finance LLC); Royal Bank of Canada; Raymond James Bank, FSB;Barclays Bank plc; Webster Bank, National Association; Natixis, New YorkBranch; DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt AmMain; Branch Banking & Trust Company; and Sumitomo Mitsui BankingCorporation.

 

**Note 7.****                     ****Employee Benefit Plan with Related Party**

 

The General Partner employs substantially all ofthe Partnership’s employees and charges the Partnership for theirservices.  The Partnership alsoreimburses the General Partner for its contributions under the General Partner’s401(k) Savings and Profit Sharing Plan and the General Partner’s qualifiedand non-qualified pension plans.  ThePartnership’s net periodic benefit cost for the defined benefit pension planconsisted of the following components (in thousands):

 

| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                     | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                   |       | $                                | 53         |                            | $          | 325 |   | $ | 160 |   | $ | 975 |   |
| Interest cost                  |       | 163                              |       | 230                             |       | 490 |   | 687 |   |
| Expected return on plan assets |       | (169                             | )          | (161                            | )          | (509 | ) | (482 | ) |
| Recognized net actuarial loss  |       | —                           |       | 48                              |       | — |   | 144 |   |
| Net periodic benefit cost      |       | $                                | 47         |                            | $          | 442 |   | $ | 141 |   | $ | 1,324 |   |

 

EffectiveDecember** **31, 2009, the General Partner’squalified pension plan (the “Plan”) was amended to freeze participation in andbenefit accruals under the Plan. Primarily for this reason, the net periodic benefit cost decreased byapproximately $0.4** **millionand $1.2** **million for the three and ninemonths ended September** **30, 2010,respectively, compared to the same periods in 2009.

 

**Note 8.****                     ****Related Party Transactions**

 

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 July 2014 with annual renewaloptions thereafter.  The agreement isaccounted for as an operating lease.  Theexpenses under this agreement totaled approximately $2.2** **millionand $2.1** **million for the three monthsended September** **30,****2010and 2009, respectively, and approximately $6.5** **millionand $6.3** **million for the nine months endedSeptember** **30,****2010and 2009, respectively.

 

18

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

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 $21,900 and $18,500 for the three months endedSeptember 30, 2010 and 2009, respectively, and approximately $65,600 and$55,000 for the nine months ended September 30, 2010 and 2009,respectively.  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.  As ofSeptember 30, 2010, no such notice of termination was given by either party.

 

Pursuantto the Partnership’s Amended and Restated Services Agreement with AllianceEnergy LLC (“Alliance”), the Partnership also provides certainadministrative, accounting and information processing services, and the use ofcertain facilities, to Alliance, an affiliate of the Partnership that is whollyowned by AE Holdings Corp., which is approximately 95% owned by members ofthe Slifka family.  The income from theseservices was approximately $49,000 and $95,500 for the three months endedSeptember 30, 2010 and 2009, respectively, and $147,000 and $286,500 forthe nine months ended September 30, 2010 and 2009, respectively.  These fees were recorded as an offset toselling, general and administrative expenses in the accompanying consolidatedstatements of income.  The agreementextends through January 1, 2011.

 

OnMay 12, 2010, the Partnership and Alliance entered into a letter agreementwith respect to shared services for the year ending December 31, 2010,pursuant to which the Partnership will provide information technologyinfrastructure to Alliance for $106,000 for the year in addition to productionand project support and routine information technology maintenance at a rate of$100.00 an hour.  Also for the yearending December 31, 2010, the Partnership will provide limited legalservices to Alliance for $75,000 and limited accounting, treasury, tax andhuman resources support for $15,000.  Theincome from these services was approximately $50,000 and $85,000 for the threeand nine months ended September 30, 2010, respectively.

 

ThePartnership sells refined petroleum products to Alliance at prevailing marketprices at the time of delivery.  Sales toAlliance were approximately $4.1 million and $5.7 million for thethree months ended September 30, 2010 and 2009, respectively, and$17.6 million and $12.3 million for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

Inaddition, the Global Companies LLC and Global Montello Group Corp., whollyowned subsidiaries of the Partnership, entered into management agreements withAlliance in connection with the Partnership’s September 2010 acquisitionof retail gas stations from ExxonMobil. The expenses for the management fee and overhead reimbursement wereapproximately $125,000 and $132,000, respectively, through September 30,2010.  See Note 11 and Item 2,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Acquisition.”

 

TheGeneral Partner employs substantially all of the Partnership’s employees andcharges the Partnership for their services. The expenses for the three months ended September 30, 2010 and2009, including payroll, payroll taxes and bonus accruals, were$8.8 million and $9.2 million, respectively, and $28.6 millionand $29.1 million for the nine months ended September 30, 2010 and2009, respectively.  The Partnership alsoreimburses the General Partner for its contributions under the General Partner’s401(k) Savings and Profit Sharing Plan and the General Partner’s qualifiedand non-qualified pension plans.

 

19

----

 

**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):

 

| ** **                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Receivables from Alliance                |       | $                      | 464        |                  | $          | 838 |   |
| Receivables from GPC                     |       | 126                    |       | 251                   |       |
| Receivables from the General Partner (1) |       | 723                    |       | 476                   |       |
| Total                                    |       | $                      | 1,313      |                  | $          | 1,565 |   |

 

(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 earnings, 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 on the date ofdetermination of available cash for the quarter; less the amount of cashreserves established by the General Partner to provide for the proper conductof the Partnership’s business, to comply with applicable law, any of thePartnership’s debt instruments, or other agreements or to provide funds fordistributions to unitholders and the General Partner for any one or more of thenext four quarters.

 

ThePartnership will make distributions of available cash from distributable cashflow for any quarter during the subordination period as defined in itspartnership agreement in the following manner: firstly, 98.66% to the commonunitholders, pro rata, and 1.34% to the General Partner, until the Partnershipdistributes for each outstanding common unit an amount equal to the minimum quarterlydistribution for that quarter; secondly, 98.66% to the common unitholders, prorata, and 1.34% 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, 98.66% to the subordinatedunitholders, pro rata, and 1.34% 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 IDRs, based on the percentages as provided below.

 

Asthe holder of the IDRs, the General Partner is entitled to incentivedistributions if the amount that the Partnership distributes with respect toany quarter exceeds specified target levels shown below:

 
| ** **                     | ** ** | **Total Quarterly Distribution** | ** ** | **Marginal Percentage Interest in  Distributions** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Target Amount**                     | ** ** | **Unitholders**                                                   | ** ** | **General Partner** | ** ** |
| Minimum Quarterly Distribution |       | $0.4625                                    |       | 98.66%                                                            |       | 1.34 | % |   |
| First Target Distribution      |       | $0.4625                                    |       | 98.66%                                                            |       | 1.34 | % |   |
| Second Target Distribution     |       | above $0.4625 up to $0.5375                |       | 85.66%                                                            |       | 14.34 | % |   |
| Third Target Distribution      |       | above $0.5375 up to $0.6625                |       | 75.66%                                                            |       | 24.34 | % |   |
| Thereafter                     |       | above $0.6625                              |       | 50.66%                                                            |       | 49.34 | % |   |

 

20

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

ThePartnership paid the following cash distribution during 2010 (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** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------|------------|-------------------------|------------|----------------------|------------|-----------------------------|------------|-----------------------------------|------------|
|                                      |       |                                  |       |              |       |                    |       |                 |       |                        |       |                              |       |
| 02/12/10 (1)(2)                           |       | $0.4875                               |       | $3,621            |       | $2,751                  |       | $112                 |       | $   50       |       | $   6,534          |       |
| 05/14/10 (2)                              |       | $0.4875                               |       | $5,527            |       | $2,751                  |       | $112                 |       | $   65       |       | $   8,455          |       |
| 08/13/10 (2)                              |       | $0.4875                               |       | $5,527            |       | $2,751                  |       | $112                 |       | $   65       |       | $   8,455          |       |

 

(1)          Prior to thePartnership’s public offering (see Note 15), the limited partner interestwas 98.27% and the general partner interest was 1.73%.

(2)          Thisdistribution of $0.4875 per unit resulted in the Partnership exceeding its firsttarget distribution for the fourth quarter of 2009 and the first and secondquarters of 2010.  As a result, theGeneral Partner, as the holder of the IDRs, received an incentive distribution.

 

Inaddition, on October 20, 2010, the board of directors of the GeneralPartner declared a quarterly cash distribution of $0.4950 per unit for theperiod from July 1, 2010 through September 30, 2010 ($1.98 per uniton an annualized basis).  OnNovember 12, 2010, the Partnership will pay this cash distribution to itscommon and subordinated unitholders of record as of the close of businessNovember 3, 2010.  This distributionwill result in the Partnership exceeding its first target distribution for thequarter ended September 30, 2010.

 

**Note 10.****              ****Segment Reporting**

 

ThePartnership is a wholesale and commercial distributor of gasoline, distillatesand residual oil whose business is organized within two reporting 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, 2009.

 

Inthe Wholesale segment, the Partnership sells gasoline, home heating oil,diesel, kerosene and residual oil to unbranded and branded retail gasolinestations and other resellers of transportation fuels, home heating oilretailers and wholesale distributors. Generally, customers use their own vehicles or contract carriers to takedelivery of the product at bulk terminals and inland storage facilities thatthe Partnership owns 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 end user customers in the public sector and to large commercialand industrial end user customers, either through a competitive bidding processor through contracts of various terms, (2) sales of custom blendeddistillates and residual oil delivered by barges or from a terminal dockthrough bunkering activity, and (3) sales of branded gasoline to endusers.  Commercial segment end usercustomers include federal and state agencies, municipalities, large industrialcompanies, many autonomous authorities such as transportation authorities andwater resource authorities, colleges and universities, a limited group of smallutilities and gasoline customers at gasoline stations.  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.

 

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 the business, it is not reasonablypossible for the Partnership to allocate the components of operating costs andexpenses between the reportable segments. Additionally, due to the commingled nature and uses of the

 

21

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

Partnership’sassets, it is not reasonably possible for the Partnership to allocate assetsbetween operating segments.  There wereno intersegment sales for any of the periods presented below.

 

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Wholesale Segment:**                      |       |                             |       |                            |       |   |   |   |   |
| Sales                                       |       |                             |       |                            |       |   |   |   |   |
| Distillates                                 |       | $                                | 376,878    |                            | $          | 329,362 |   | $ | 1,778,730 |   | $ | 1,741,038 |   |
| Gasoline                                    |       | 1,066,764                        |       | 871,770                         |       | 2,929,257 |   | 2,093,759 |   |
| Residual oil                                |       | 8,505                            |       | 6,594                           |       | 28,902 |   | 23,937 |   |
| Total                                       |       | $                                | 1,452,147  |                            | $          | 1,207,726 |   | $ | 4,736,889 |   | $ | 3,858,734 |   |
| Net product margin (1)                      |       |                             |       |                            |       |   |   |   |   |
| Distillates                                 |       | $                                | 18,440     |                            | $          | 15,456 |   | $ | 58,920 |   | $ | 62,786 |   |
| Gasoline                                    |       | 16,412                           |       | 10,999                          |       | 48,333 |   | 34,912 |   |
| Residual oil                                |       | 1,864                            |       | 1,814                           |       | 7,154 |   | 6,928 |   |
| Total                                       |       | $                                | 36,716     |                            | $          | 28,269 |   | $ | 114,407 |   | $ | 104,626 |   |
| **Commercial Segment:**                     |       |                             |       |                            |       |   |   |   |   |
| Sales                                       |       | $                                | 94,692     |                            | $          | 77,605 |   | $ | 309,396 |   | $ | 260,701 |   |
| Net product margin (1)                      |       | $                                | 2,318      |                            | $          | 3,717 |   | $ | 10,040 |   | $ | 11,241 |   |
| **Combined sales and net product  margin:** |       |                             |       |                            |       |   |   |   |   |
| Sales                                       |       | $                                | 1,546,839  |                            | $          | 1,285,331 |   | $ | 5,046,285 |   | $ | 4,119,435 |   |
| Net product margin (1)                      |       | $                                | 39,034     |                            | $          | 31,986 |   | $ | 124,447 |   | $ | 115,867 |   |
| Depreciation allocated to cost of sales     |       | 3,939                            |       | 2,713                           |       | 9,623 |   | 8,091 |   |
| **Combined gross profit**                   |       | $                                | 35,095     |                            | $          | 29,273 |   | $ | 114,824 |   | $ | 107,776 |   |

 

----

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

 

A reconciliation of the totals reported for thereportable segments to the applicable line items in the consolidated financialstatements is as follows (in thousands):

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Combined gross profit**                                               |       | $                                | 35,095     |                            | $          | 29,273 |   | $ | 114,824 |   | $ | 107,776 |   |
| **Operating  costs and expenses not allocated to reportable segments:** |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative expenses                            |       | 17,246                           |       | 13,859                          |       | 47,715 |   | 45,233 |   |
| Operating expenses                                                      |       | 10,405                           |       | 8,666                           |       | 28,867 |   | 26,278 |   |
| Amortization expenses                                                   |       | 1,005                            |       | 747                             |       | 2,430 |   | 2,350 |   |
| **Total operating costs and  expenses**                                 |       | 28,656                           |       | 23,272                          |       | 79,012 |   | 73,861 |   |
| Operating income                                                        |       | 6,439                            |       | 6,001                           |       | 35,812 |   | 33,915 |   |
| Interest expense                                                        |       | (5,888                           | )          | (3,742                          | )          | (14,326 | ) | (10,940 | ) |
| Income tax expense                                                      |       | —                           |       | (200                            | )          | (387 | ) | (1,075 | ) |
| **Net income**                                                          |       | $                                | 551        |                            | $          | 2,059 |   | $ | 21,099 |   | $ | 21,900 |   |

 

22

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

Therewere no foreign sales for the three and nine months ended September 30,2010 and 2009.  The Partnership has noforeign assets.

 

**Note 11.****              ****Acquisitions**

 

***Retail Gas Stations and Supply Rights***—OnSeptember 30, 2010, the Partnership completed its acquisition of retailgas stations and supply rights from ExxonMobil for cash consideration ofapproximately $202.3 million, plus the assumption of certain environmentalliabilities (see Note 12).  ThePartnership acquired 190 Mobil branded retail gas stations located inMassachusetts, New Hampshire and Rhode Island (the “Subject States”).  Of the 190 stations, 42 are directly operatedby Alliance and 148 are dealer operated subject to existing franchiseagreements assigned to and assumed by the Partnership.  Additionally, the Partnership acquired theright to supply Mobil branded fuel to such stations and to 31 Mobil brandedstations that are owned and operated by independent dealers in the SubjectStates.  The Partnership outsourced theday-to-day management and operations of these 221 locations to Alliance, anexperienced retail operator.  Becausethis acquisition was completed late in the third quarter of 2010, the resultsof the acquisition were immaterial to the Partnership’s consolidated financialsstatements for the three and nine months ended September 30, 2010.  See Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Acquisition,” for additional informationon the transaction.

 

In connection with thisacquisition, the Partnership incurred expenses of approximately $1.1 million and $1.2 million for the three and nine months ended September 30, 2010, respectively, which are included in selling,general and administrative expenses in the accompanying statements of income.  The Partnership also incurred approximately $0.6 millionin operating expenses for the three and nine months ended September 30, 2010 which are included in operating expenses in the accompanying statements of income.  The Partnership financed the acquisitionthrough borrowings under its credit facility. This acquisition was accounted for as a business combination.

 

Theallocation of the purchase price will be finalized as the Partnership receivesadditional information relevant to the acquisition, including a final valuationof the assets purchased and further information with respect to theenvironmental liabilities assumed.  Thefinal allocation for this acquisition may be different from the preliminaryestimates presented below.  The impact ofany adjustments to the final allocation is not expected to be material.  The following table presents the preliminaryallocation of the cash consideration to the estimated fair value of the assetsacquired and environmental liabilities assumed (in thousands):

 
| Assets purchased:                       |   |    |    |
|-----------------------------------------|--------|---------|---------|
| Buildings and improvements              |   | $       | 57,831  |   |
| Land                                    |   | 117,808 |    |
| Fixtures and equipment                  |   | 44,974  |    |
| Intangibles                             |   | 11,700  |    |
| Total assets purchased                  |   | 232,313 |    |
| Less environmental  liabilities assumed |   | (30,000 | )       |
| Total cash consideration                |   | $       | 202,313 |   |

 

23

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 11.****              ****Acquisitions (continued)**

 

Theintangible assets acquired in the transaction consist of the following (inthousands):

 
| **Description**  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Amortization  Period** | ** ** |
|------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Supply contracts |       | $                           | 11,700     |                          | $          | (195                        | )          | $                        | 11,505     |   | 5 years |   |
|                  |            |                             |            |                               |            |                             |            |                          |            |  |  |  |

 

Amortizationexpense was approximately $195,000 for the three and nine months endedSeptember 30, 2010.

 

***Warex Terminals***—On June 2, 2010, the Partnership completed its acquisition of threerefined petroleum products terminals located in Newburgh, New York from WarexTerminals Corporation (the “Warex Terminals”) for cash consideration of $46.0 million plus the assumption of certain environmentalliabilities (see Note 12).  In addition, the Partnership purchased approximately $9.0 million of inventory in the normal course of business thatwas stored in the acquired terminals. The Partnership incurred no selling, general and administrative expensesfor the three months ended September 30, 2010 and approximately $1.4 million for the nine months ended September 30, 2010 which are included in the accompanying statementsof income.  The Partnership also incurredapproximately $0.7 million and $1.4 million in operating expenses for the three and nine monthsended September 30,2010, respectively, which are included in operating expenses in the accompanying statements of income.  The Partnership financed the acquisitionthrough its revolving credit facility. This acquisition was accounted for as a business combination pursuant toaccounting guidance related to business combinations.

 

Theallocation of the purchase price will be finalized as the Partnership receivesadditional information relevant to the acquisition, including a final valuationof the assets purchased and further information with respect to theenvironmental liabilities assumed.  Thefinal allocation for this acquisition may be different from the preliminaryestimates presented below.  The impact ofany adjustments to the final allocation is not expected to be material.  The following table presents the preliminaryallocation of the cash consideration to the estimated fair value of the assetsacquired and environmental liabilities assumed (in thousands):

 
| Assets purchased:                                       |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Buildings, docks, terminal facilities and  improvements |   | $      | 34,887 |   |
| Land                                                    |   | 4,500  |   |
| Fixtures, equipment and automobiles                     |   | 525    |   |
| Intangibles                                             |   | 7,634  |   |
| Total assets purchased                                  |   | 47,546 |   |
| Less environmental  liabilities assumed                 |   | (1,500 | )      |
| Total cash consideration                                |   | $      | 46,046 |   |

 

Theintangible assets acquired in the transaction consist of the following (inthousands):

 
| **Description**         | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Amortization  Period** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Customer relationships  |       | $                           | 6,524      |                          | $          | (145                        | )          | $                        | 6,379      |   | 15 years |   |
| Supply contracts        |       | 1,110                       |       | (25                           | )          | 1,085                       |       | 15 years                 |       |
| Total intangible assets |       | $                           | 7,634      |                          | $          | (170                        | )          | $                        | 7,464      |   |   |   |

 

Amortizationexpense was approximately $127,000 and $170,000 for the three and nine monthsended September 30, 2010, respectively.

 

24

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 11.****              ****Acquisitions (continued)**

 

***Valuation of Intangible Assets*** — Theestimated purchase price for each of the above acquisitions has been allocatedto assets acquired and liabilities assumed based on their estimated fairvalues.  The Partnership has thenallocated the purchase price in excess of net tangible assets acquired toidentifiable intangible assets, based upon a detailed valuation that usesinformation and assumptions provided by management.

 

Aspart of the preliminary purchase price allocations, identifiable intangibleassets include supply contracts and, in the case of Warex, customerrelationships.  The Partnership primarilyused the income approach to value the existing other intangibles.  This approach calculates fair value byestimating future cash flows attributable to each intangible asset anddiscounting them to present value at a risk-adjusted discount rate.

 

ThePartnership utilized accounting guidance related to intangible assets whichlists the pertinent factors to be considered when estimating the useful life ofan intangible asset.  These factorsinclude, in part, a review of the expected use by the Partnership of the assetsacquired, the expected useful life of another asset (or group of assets)related to the acquired assets and legal, regulatory or other contractualprovisions that may limit the useful life of an acquired asset.  The Partnership expects to amortize theseintangible assets on a straight-line basis over their estimated useful livesusing a consistent method that is based on estimated cash flows.

 

Theestimated remaining amortization expense for intangible assets acquired in 2010for each of the five succeeding years and thereafter is as follows (inthousands):

 

| 2010       |   | $     | 712    |   |
|------------|--------|-------|--------|--------|
| 2011       |   | 2,849 |   |
| 2012       |   | 2,849 |   |
| 2013       |   | 2,849 |   |
| 2014       |   | 2,849 |   |
| Thereafter |   | 6,861 |   |
| Total      |   | $     | 18,969 |   |

 

**Note 12.****              ****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 into the environment, includingcontaminated groundwater, or to implement best management practices to preventfuture contamination.

 

ThePartnership maintains insurance of various types with varying levels ofcoverage that it considers adequate under the circumstances to cover itsoperations and properties.  The insurancepolicies are subject to deductibles that the Partnership considers reasonableand not excessive.  In addition, thePartnership has entered into indemnification agreements with various sellers inconjunction with several of its acquisitions. Allocation of environmental liability is an issue negotiated inconnection with each of the Partnership’s acquisition transactions.  In each case, the Partnership makes anassessment of potential environmental liability exposure based on availableinformation.  Based on that assessmentand relevant economic and risk factors, the Partnership determines whether to,and the extent to which it will, assume liability for existing environmentalconditions.

 

25

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 12.****              ****Environmental Liabilities (continued)**

 

Inconnection with the September 2010 acquisition of the retail gas stationsfrom ExxonMobil, the Partnership assumed certain environmental liabilities withrespect to the Acquired Sites (as defined in Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Acquisition”).  The assumed environmental liabilities includeon-going environmental remediation at approximately 70 of the Acquired Sitesand future remediation activities required by applicable federal, state orlocal law or regulation.  Remedial actionplans are in place with the applicable state regulatory agencies for themajority of these locations, including plans for soil and groundwater treatmentsystems at eight sites. Based on consultations with environmental engineers,the Partnership’s estimated cost of the remediation is expected to beapproximately $30.0 million to be expended over an extended period oftime.  As a result, the Partnershiprecorded, on an undiscounted basis, total environmental liabilities ofapproximately $30.0 million, which was recorded as a long-term liabilityin the accompanying consolidated balance sheet at September 30, 2010.

 

Inconnection with the June 2010 acquisitionof the Warex Terminals, the Partnership assumed certain environmentalliabilities, including certain ongoing remediation efforts.  As a result, the Partnershiprecorded, on an undiscounted basis, a total environmental liability ofapproximately $1.5 million, which was recorded as a long-term liability inthe accompanying consolidated balance sheet at September 30, 2010.  The Partnership does not believe thatcompletion of the ongoing remediation efforts will result in material costs inexcess of the environmental reserve or have a material impact on itsoperations.

 

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 both terminals.  As a result, the Partnership recorded, on anundiscounted basis, total environmental liabilities of approximately$1.2 million, of which approximately $0.7 million was paid by thePartnership as of September 30, 2010. The remaining liability of $0.5 million was recorded as a currentliability of $0.4 million and a long-term liability of $0.1 millionin the accompanying consolidated balance sheet at September 30, 2010.  The Partnership has implemented the remedialaction plans and 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.

 

Inconnection with the May 2007 acquisition of ExxonMobil’s Albany andNewburgh, New York and Burlington, Vermont terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations undera proposed remedial action plan submitted by ExxonMobil to NYDEC with respectto the Albany, New York terminal.  As aresult, the Partnership recorded, on an undiscounted basis, total environmentalliabilities of approximately $8.0** **million.  In June 2008, the Partnership submitteda remedial action work plan to NYDEC, implementing NYDEC’s conditional approvalof the remedial action plan submitted by ExxonMobil.  The Partnership responded to NYDEC’s requestsfor additional information and conducted pilot tests for the remediationoutlined in the work plan.  Based on theresults of such pilot tests, the Partnership changed its estimate and reducedthe environmental liability by $2.8** **millionduring the fourth quarter ended December 31, 2008.  At September 30, 2010, this liabilityhad a balance of $4.9 million which was recorded as a current liability of$2.9 million and a long-term liability of $2.0 million in theaccompanying consolidated balance sheet. In July 2009, NYDEC approved the remedial action work plan, and thePartnership signed a Stipulation Agreement with NYDEC to govern implementationof the approved plan.  The Partnershipdoes not believe that compliance with the terms of the approved remedial actionwork plan will result in material costs in excess of the environmental reserveor have a material impact on its operations.

 

26

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 12.****              ****Environmental Liabilities (continued)**

 

Inconnection with the 2006 acquisition of its Macungie, Pennsylvania terminal(the “Global Macungie Terminal”), the Partnership assumed certain existingenvironmental liabilities at the terminal. The Partnership did not accrue for these contingencies as it believesthat the aggregate amount of these liabilities cannot be reasonably estimated atthis time.  The Partnership also executedan Administrative Order on Consent (“AOC”) with the U.S. EnvironmentalProtection Agency, Region III (“EPA, Region III”) requiring certaininvestigatory activities at the Global Macungie Terminal.  The Partnership believes that theinvestigatory activities required by the AOC have been completed, and a finalreport concerning these investigatory activities has been submitted.  In accordance with the AOC, the Partnershiprequested that EPA, Region III issue a Notice of Completion with respect to theAOC.  On October 5, 2010, EPA,Region III issued a Notice of Completion stating that all work required by theAOC has been completed.

 

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 these reserves are adequate, no assurances can be made that any costsincurred in excess of these reserves or outside of indemnifications or nototherwise covered by insurance would not have a material adverse effect on thePartnership’s financial condition, results of operations or cash flows.

 

**Note 13.****              ****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 award underthe LTIP may be acquired in the open market or from any affiliate, be newlyissued 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”).

 

*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 vestedon December 31, 2009 and became payable on a one-for-one basis in commonunits of the Partnership (or cash equivalent) in connection with theachievement of certain performance goals over the vesting period.  The DERs that were granted in tandem with thephantom units vested and became payable in cash simultaneously with the vestingof the phantom units.

 

ThePartnership recorded compensation expenses with respect to these awards ofapproximately $0.2 million and $0.6 million for the three and nine monthsended September 30, 2009, respectively, which are included in selling,general and administrative expenses in the accompanying consolidated statementsof income.  The total compensation costrelated to these awards was fully recognized as of December 31, 2009.  In March 2010, the Partnershipdistributed 62,620 common units in settlement of this award, and inApril 2010, the Partnership paid approximately $305,000 in associatedDERs.

 

27

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 13.****              ****Long-Term Incentive Plan (continued)**

 

*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, vest in six equal installments onJune 30 and 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 compensationexpenses related to this phantom unit award of approximately $58,000 and$136,000 for the three months ended September 30, 2010 and 2009, respectively,and $236,000 and $596,000 for the nine months ended September 30, 2010 and2009, respectively, 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 September 30, 2010 isapproximately $158,000 and is expected to be recognized over the remainingrequisite service period.  OnJune 30, 2009, 16,617 common units vested under this award and were distributedto the named executive officer, and in July 2009, the Partnership paid acash distribution related to these units of approximately $8,000.  On December 31, 2009, 16,617 commonunits vested under this award and were distributed, and in January 2010,the Partnership paid a cash distribution related to these units ofapproximately $32,000.  On June 30,2010, 16,617 common units vested under this award, and in July 2010, thePartnership distributed these units and paid a cash distribution related tothese units of approximately $48,600.

 

*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) onDecember 31, 2013 (or potentially sooner as described below), subject ineach case to continued employment of the respective employee and subject to aperformance goal 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.

 

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) $34.00 at any time during the period from June 5, 2012 throughDecember 31, 2013, then all of the remaining phantom units willautomatically vest. “Average Unit Price” means the closing market price of thePartnership’s common units for any 10-consecutive trading day period.  On August 21, 2009, the Average UnitPrice of $21.00 per unit for the first tranche was achieved and, as a result,25% of the phantom units vested at a price of $22.50 per unit.

 

Thefair value of the award at the February 5, 2009 grant date approximatedthe fair value of the Partnership’s common units at that date, reduced by thepresent value of the distributions stream on the equivalent number of commonunits over the derived service period. Compensation cost is recognized ratably over the derived service periodwhich was determined for each tranche using the Monte Carlo simulationmodel.  The derived service period of theaward was assessed using expected volatility which was estimated based onhistorical volatility of the Partnership’s common units.  The Partnership recorded compensationexpenses related to this phantom unit award of approximately $39,000 and$337,000 for the three months ended September 30, 2010 and 2009,respectively, and $117,000 and $420,000 for the nine months endedSeptember 30, 2010 and 2009, respectively, which are included in selling,general and administrative expenses in the accompanying consolidated statementsof operations.  The total compensationcost related to the non-vested awards not yet recognized at September 30,2010 is approximately $510,000 and is expected to be recognized ratably overthe remaining derived service period.

 

28

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 13.****              ****Long-Term Incentive Plan (continued)**

 

*Non-Employee Directors Phantom Units*

 

OnApril 20, 2010, the Compensation Committee of the board of directors ofthe General Partner granted awards of 3,600 phantom units to certainnon-employee directors of the General Partner. The phantom units granted vest on December 31, 2010 and will becomepayable on a one-for-one basis in common units of the Partnership (or cashequivalent).  The fair value of thisaward at the April 20, 2010 grant date approximated the fair value of thePartnership’s common units at that date.

 

ThePartnership will recognize as compensation expense the value of the portion ofthe award that is ultimately expected to vest over the requisite service periodon a straight-line basis.  ThePartnership recorded compensation expenses related to this phantom unit awardof approximately $27,000 for the three and nine months ended September 30,2010.  The total compensation costrelated to the non-vested awards not yet recognized at September 30, 2010is approximately $55,000 and is expected to be recognized ratably over theremaining requisite service period.

 

*Repurchase Program*

 

InMay 2009, the board of directors of the General Partner authorized therepurchase of the Partnership’s common units (the “Repurchase Program”) for thepurpose of assisting it in meeting the General Partner’s anticipatedobligations to deliver common units under the LTIP and meeting the GeneralPartner’s obligations under existing employment agreements and other employmentrelated obligations of the General Partner (collectively, the “General Partner’sObligations”).  The Partnership isauthorized to spend up to $6.6 million to acquire up to 445,000 of itscommon units in the aggregate, over an extended period of time, consistent withthe General Partner’s Obligations. Common units of the Partnership may be repurchased from time to time inopen market transactions, including block purchases, or in privately negotiatedtransactions.  Such authorized unitrepurchases may be modified, suspended or terminated at any time, and aresubject to price, economic and market conditions, applicable legal requirementsand available liquidity.  ThroughSeptember 30, 2010, the General Partner repurchased 195,291 common unitspursuant to the Repurchase Program for approximately $4.0 million, ofwhich 62,620 phantom units vested under the *“Long-Term Incentive Plan,”*49,851 phantom units vested under the *“Three-Year Phantom Units”*award and 69,444 phantom units vested under the “*Five-YearPhantom Units”*award.

 

AtSeptember 30, 2010 and December 31, 2009, common units outstandingexcluded 46,827 and 47,143 common units, respectively, held on behalf of thePartnership pursuant to its Repurchase Program and for future satisfaction ofthe General Partner’s Obligations.

 

29

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 14.****              ****Fair Value Measurements**

 

Certainof the Partnership’s assets and liabilities are measured at fair value.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants at the measurement date.

 

TheFinancial Accounting Standards Board (“FASB”) established a fair valuehierarchy, which prioritizes the inputs used in measuring fair value into thefollowing 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.                                                                                                                                                                                                                                              |

 

Thefollowing table presents those financial assets and financial liabilitiesmeasured at fair value on a recurring basis as of September 30, 2010 (inthousands):

 
| ** **                                      | ** ** | **Fair Value as of September 30, 2010** | ** ** | **Fair Value as of December 31, 2009** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Total**                                                             | ** ** | **Level 1**                                                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                     |       |                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Hedged inventories                              |       | $                                                                     | 533,705    |                                                                 | $          | — |   | $ | 533,705 |   | $ | — |   | $ | 472,533 |   | $ | — |   | $ | 472,533 |   | $ | — |   |
| Fair value of forward fixed price contracts     |       | 13,268                                                                |       | —                                                               |       | 13,268 |   | — |   | 3,089 |   | — |   | 3,089 |   | — |   |
| Swap agreements and options                     |       | 162                                                                   |       | 100                                                                  |       | 62 |   | — |   | 3,009 |   | 2,966 |   | 43 |   | — |   |
| Forward starting swap                           |       | —                                                                |       | —                                                               |       | — |   | — |   | 80 |   | — |   | 80 |   | — |   |
| Total assets                                    |       | $                                                                     | 547,135    |                                                                 | $          | 100 |   | $ | 547,035 |   | $ | — |   | $ | 478,711 |   | $ | 2,966 |   | $ | 475,745 |   | $ | — |   |
|                                            |       |                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**                                |       |                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Obligations on forward fixed price contracts    |       | $                                                                     | (21,414    | )                                                                    | $          | — |   | $ | (21,414 | ) | $ | — |   | $ | (21,114 | ) | $ | — |   | $ | (21,114 | ) | $ | — |   |
| Swap agreements and option contracts            |       | (1,746                                                                | )          | (100                                                                 | )          | (1,646 | ) | — |   | (3,669 | ) | (118 | ) | (3,551 | ) | — |   |
| Interest rate collars and forward starting swap |       | (17,851                                                               | )          | —                                                               |       | (17,851 | ) | — |   | (7,047 | ) | — |   | (7,047 | ) | — |   |
| Total liabilities                               |       | $                                                                     | (41,011    | )                                                                    | $          | (100 | ) | $ | (40,911 | ) | $ | — |   | $ | (31,830 | ) | $ | (118 | ) | $ | (31,712 | ) | $ | — |   |

 

Themajority of the Partnership’s derivatives outstanding are reported at fairvalue based market quotes that are deemed to be observable inputs in an activemarket for similar assets and liabilities and are considered Level 2inputs for purposes of fair value disclosures. Specifically, the fair values of the Partnership’s financial assets andfinancial liabilities provided above were derived from NYMEX and New YorkHarbor quotes for the Partnership’s hedged inventories, forward fixed pricecontracts, swap agreements and option contracts and from the LIBOR rates forthe Partnership’s interest rate collars and forward starting swap.  The Partnership has not changed its valuationtechniques or inputs during the three and nine month periods endedSeptember 30, 2010.

 

Forassets and liabilities measured on a non-recurring basis during the period,accounting guidance requires quantitative disclosures about the fair valuemeasurements separately for each major category.  See Note 11 for acquired assets andliabilities measured on a non-recurring basis in the current period.  There were no other remeasured assets orliabilities at fair value on a non-recurring basis during the quarter endedSeptember 30, 2010.

 

30

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**GLOBAL PARTNERSLP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 14.****              ****Fair Value Measurements (continued)**

 

*Financial Instruments*

 

Thefair value of the Partnership’s financial instruments approximated the carryingvalue as of September 30, 2010 and December 31, 2009, in each casedue to the short-term and the variable interest rate nature of the financialinstruments.

 

**Note 15.****              ****Unitholders’ Equity**

 

OnMarch 16, 2010, the Partnership entered into an Underwriting Agreement(the “Underwriting Agreement”) relating to the public offering of 3,400,000common units representing limited partner interests in the Partnership, at apublic offering price of $22.75, less underwriting discounts and commissions of$1.00 per common unit.  Pursuant to theUnderwriting Agreement, the Partnership also granted the underwriters an optionto purchase an additional 510,000 common units from the Partnership at the sameprice, which option was exercised.  On March 19,2010, the Partnership completed the public offering of 3,910,000 common unitsfor approximately $89.0 million.  The net proceeds from theoffering of $84.6 million, after deducting approximately $4.4 million in underwriting fees and offering expenses, wereused to reduce indebtedness under the Credit Agreement.

 

**Note 16.****              ****Property and Equipment**

 

Propertyand equipment consisted of the following (in thousands):

 
| ** **                                              | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                    |       |                         |       |                        |       |
| Buildings, docks, terminal facilities and  improvements |       | $                            | 249,069    |                        | $          | 153,954 |   |
| Land                                                    |       | 148,417                      |       | 26,110                      |       |
| Fixtures, equipment and automobiles                     |       | 55,288                       |       | 8,866                       |       |
| Construction in process                                 |       | 9,124                        |       | 5,028                       |       |
| Total property and equipment                            |       | 461,898                      |       | 193,958                     |       |
| Less accumulated  depreciation                          |       | (44,879                      | )          | (34,666                     | )          |
| Total                                                   |       | $                            | 417,019    |                        | $          | 159,292 |   |

 

Thenet increase of approximately $257.7 million in total property andequipment was primarily due to the Partnership’s acquisitions of retail gasstations from ExxonMobil and the terminal acquisition from Warex (seeNote 11).

 

**Note 17.****              ****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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Federal statutory income tax rate                 |       | 34.0                                                 | %          |                                                | 34.0       | % |   | 34.0 | % |   | 34.0 | % |   |
| State income tax rate, net of federal tax benefit |       | 6.4                                                  | %          |                                                | 6.4        | % |   | 6.4 | % |   | 6.4 | % |   |
| Partnership income not subject to tax             |       | (40.4                                                | )%         |                                                | (31.5      | )% |   | (38.6 | )% |   | (35.7 | )% |   |
| Effective income tax rate                         |       | —                                               | %          |                                                | 8.9        | % |   | 1.8 | % |   | 4.7 | % |   |

 

31

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 18.****              ****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 below and in Note 12included herein, the Partnership is not aware of any significant legal orgovernmental proceedings against it, or contemplated to be brought againstit.  The Partnership maintains insurancepolicies with insurers in amounts and with coverage and deductibles as theGeneral Partner believes are reasonable and prudent.  However, the Partnership can provide noassurance that this insurance will be adequate to protect it from all materialexpenses related to potential future claims or that these levels of insurancewill be available in the future at economically acceptable prices.

 

***Other***

 

Certainof the Partnership’s employees at its terminal in Oyster Bay (Commander), NewYork were employed under a collective bargaining agreement that expired in April 2010.  The Partnership has negotiated a newcollective bargaining agreement, in principle, with a newly-elected unionrepresenting these employees.  ThePartnership does not believe the results of these negotiations will have amaterial adverse effect on its operations.

 

Certainof the Partnership’s employees at its terminals in Albany and Newburgh, NewYork acquired from ExxonMobil in 2007 are employed under a collectivebargaining agreement that expired in May, 2010. The Partnership has negotiated a new collective bargaining agreement, inprinciple, with the incumbent union.  ThePartnership does not believe the results of these negotiations will have amaterial adverse effect on its operations.

 

**Note 19.****              ****New Accounting Standard**

 

InJanuary 2010, guidance issued by the FASB related to fair valuemeasurements and disclosure was updated to require additional disclosuresrelated to transfers in and out of Level 1 and Level 2 fair valuemeasurements and enhanced detail in the Level 3 reconciliation.  This guidance clarifies the level ofdisaggregation required for assets and liabilities and the disclosures requiredfor inputs and valuation techniques used to measure the fair value of assetsand liabilities that fall in either Level 2 or Level 3.  The updated guidance was effective for thePartnership on January 1, 2010, with the exception of the Level 3disaggregation which is effective for the Partnership on January 1,2011.  The adoption had no impact on thePartnership’s consolidated financial statements.  See Note 14 for details regarding thePartnership’s assets and liabilities measured at fair value.

 

**Note 20.****              ****Subsequent Event**

 

ThePartnership evaluated all events or transactions that occurred through the datethe Partnership issued its financial statements.  Except as described below, no materialsubsequent events have occurred since September 30, 2010 that requiredrecognition or disclosure in the accompanying financial statements.

 

OnOctober 20, 2010, the board of directors of the General Partner declared aquarterly cash distribution of $0.4950 per unit ($1.98 per unit on anannualized basis) for the period from July 1, 2010 throughSeptember 30, 2010.  OnNovember 12, 2010, the Partnership will pay this cash distribution to itscommon and subordinated unitholders of record as of the close of businessNovember 3, 2010.

 

32

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**Item 2.        Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

Thefollowing discussion and analysis of financial condition and results ofoperations of Global Partners LP should be read in conjunction with thehistorical consolidated financial statements of Global Partners LP and thenotes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

**Forward-LookingStatements**

 

Someof the information contained in or incorporated by reference in this QuarterlyReport on Form 10-Q may contain forward-looking statements.  Forward-looking statements do not relatestrictly to historical or current facts and include, without limitation, anystatement that may project, indicate or imply future results, events,performance or achievements, and may contain the words “may,” “believe,” “should,”“could,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “foresee,” “continue,”“will likely result,” or other similar expressions.  In addition, any statement made by ourmanagement concerning future financial performance (including future revenues,earnings or growth rates), ongoing business strategies or prospects, andpossible actions by our partnership or its subsidiaries are alsoforward-looking statements. Forward-looking statements are not guarantees of performance.  Although we believe these forward-lookingstatements are based on reasonable assumptions, statements made regardingfuture results are subject to a number of assumptions, uncertainties and risks,many of which are beyond our control, which may cause future results to bematerially different from the results stated or implied in this document.  These risks and uncertainties include, amongother things:

 

·              We may not have sufficient cash from operations toenable us to pay the minimum quarterly distribution or maintain distributionsat current levels following establishment of cash reserves and payment of feesand expenses, including payments to our general partner.

 

·              A significant decrease in demand for refinedpetroleum products in the areas served by our storage facilities would reduceour ability to make distributions to our unitholders.

 

·              Our sales of home heating oil and residual oil couldbe significantly reduced by conversions to natural gas which conversions couldhave an adverse effect on our financial condition, results of operations andcash available for distribution to our unitholders.

 

·              Erosion of the value of the Mobil brand couldadversely affect our gasoline sales and customer traffic, which could have anadverse effect on our financial condition, results of operations and cashavailable for distribution to our unitholders.

 

·              Our gas station and convenience store business couldexpose us to an increase in consumer litigation.  An unfavorable outcome or settlement of oneor more lawsuits where insurance proceeds are insufficient or otherwiseunavailable could have an adverse effect on our financial condition, results ofoperations and cash available for distribution to our unitholders.

 

·              Our gasoline sales could be significantly reduced bya reduction in demand due to new technologies and alternative fuel sources,such as electric, hybrid or battery powered motor vehicles.  A reduction in gasoline sales could have anadverse effect on our financial condition, results of operations and cashavailable for distribution to our unitholders.

 

·              Changes to government usage mandates and tax creditscould adversely affect the availability and pricing of ethanol, which couldnegatively impact our gasoline sales. A reduction in gasoline sales could havean adverse effect on our financial condition, results of operations and cashavailable for distribution to our unitholders.

 

·              Warmer weather conditions could adversely affect ourfinancial condition, results of operations and cash available for distributionto our unitholders.

 

·              Our risk management policies cannot eliminate allcommodity risk.  In addition, anynoncompliance with our risk management policies could result in significantfinancial losses.

 

·              Our results of operations are influenced by theoverall forward market for refined petroleum products.

 

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·              Increasesand/or decreases in the prices of refined petroleum products may adverselyimpact the amount of borrowing available for working capital under our creditagreement, which credit agreement has borrowing base limitations and advancerates.

 

·              We are exposed to trade credit risk in the ordinarycourse of our business activities.

 

·              We are exposed to risk associated with our tradecredit support in the ordinary course of our business activities.

 

·              The condition of credit markets may adversely affectour liquidity.

 

·              Due to our lack of asset and geographicdiversification, adverse developments in the terminals that we use or in ouroperating areas could reduce our ability to make distributions to ourunitholders.

 

·              A serious disruption to ourinformation technology systems could significantly limit our ability to manageand operate our business efficiently, which could have a negative impact on ouroperating results and reduce our ability to make distributions to ourunitholders.

 

·              We are exposed to performance risk in our supplychain.

 

·              Our retail gasoline business is subject to both federaland state environmental and non-environmental regulations which could have amaterial adverse effect on such business.

 

·              Our general partner and its affiliates haveconflicts of interest and limited fiduciary duties, which may permit them tofavor their own interests to the detriment of unitholders.

 

·              Unitholders have limited voting rights and are notentitled to elect our general partner or its directors or to remove our generalpartner without the consent of the holders of at least 66 2/3% of the outstandingunits (including units held by our general partner and its affiliates), whichcould lower the trading price of our common units.

 

·              Unitholders may be required to pay taxes on theirshare of our income even if they do not receive any cash distributions from us.

 

Additionalinformation about risks and uncertainties that could cause actual results todiffer materially from forward-looking statements is contained in Part I, Item 1A,“Risk Factors,” in our Annual Report on Form 10-K for the year endedDecember 31, 2009 and Part II, Item 1A, “Risk Factors,” in thisQuarterly Report on Form 10-Q. Developments in any of these areas could cause our results to differmaterially from results that have been or may be anticipated or projected.

 

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-looking statementsspeak only as of the date of this Form 10-Q or, in the case offorward-looking statements, contained in any document incorporated byreference, the date of such document, and we expressly disclaim any obligationor undertaking to update these statements to reflect any change in ourexpectations or beliefs or any change in events, conditions or circumstances onwhich any forward-looking statement is based.

 

**Overview**

 

***General***

 

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in Massachusetts, Maine, Connecticut, Vermont, NewHampshire, Rhode Island, New York, New Jersey and Pennsylvania (collectively,the “Northeast”).  We are one of thelargest wholesale distributors of gasoline, distillates (such as home heatingoil, diesel and kerosene) and residual oil to wholesalers, retailers andcommercial customers in the New England states and New York.  In addition, we own and supply fuel to 190Mobil branded retail gas stations in New England and supply Mobil branded fuelto 31 independently-owned stations in New England.  We also receive revenue from retail sales ofgasoline, convenience stores sales and rental income from gasolinestations.  For the three and nine monthsended September 30, 2010, we sold approximately $1.5 billion and$5.0 billion, respectively, of refined petroleum products and smallamounts of natural gas.

 

34

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Wepurchase our refined petroleum products primarily from domestic and foreignrefiners (wholesalers), traders and producers and sell these products in tworeporting segments, Wholesale and Commercial. Like most independent marketers of refined petroleum products, we baseour pricing on spot physical prices and routinely use the NYMEX or otherderivatives to hedge 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.

 

***Acquisition***

 

OnSeptember 30, 2010, we completed our acquisition of retail gas stationsand supply rights from ExxonMobil for cash consideration of approximately$202.3 million (the “Acquisition”), plus the assumption of certainenvironmental liabilities (See Note 12 of Notes to Consolidated FinancialStatements).

 

The following is a summary of the Acquisition and certain mattersrelating to our expected operation of the acquired assets and rights.  Information regarding results and operationsof the Sites (as defined below) prior to the Acquisition, including rents, realestate taxes, sales and salaries and benefits, is based on availableinformation, including certain information provided by the seller.

 

**Assets Acquired and Liabilities Assumed —** TheAcquisition included the purchase of the following assets from ExxonMobil:

 

·                  148 stationsleased to and operated by dealers (“Dealer Leased Sites”).  130 of the Dealer Leased Sites are located inMassachusetts, 9 are located in Rhode Island and 9 are located in NewHampshire.  124 of the Dealer LeasedSites are owned by us.  24 of the DealerLeased Sites are leased by us pursuant to existing lease agreements assigned toand assumed by us and subleased by dealers.

 

Assumingwe exercise available renewal terms, the leases for the 24 Dealer Leased Sitesleased by us expire between 2011 and 2033, with an average remaining lease termof approximately 12 years.  The base rentpaid in 2009 for the 24 leased Dealer Leased Sites was approximately $1.6 million and approximately $360,000was paid for real estate taxes.  The realestate taxes paid in 2009 for the 124 owned Dealer Leased sites wasapproximately $2.0 million.  Subject toapplicable rent increases under the terms of the leases for the 24 leasedDealer Leased Sites, and any real estate tax increases imposed by applicable taxingauthority, we expect to incur comparable rent and real estate tax expenses inconnection with the future operation of the Dealer Leased Sites.

 

Eachof the Dealer Leased Sites are leased or subleased, as applicable, to andoperated by dealers pursuant to existing franchise agreements assigned to andassumed by us.  The franchise agreementsfor the Dealer Leased Sites are generally for three-year terms with varyingexpiration dates and contain renewal terms pursuant to and governed byapplicable federal laws.  In 2009, thegross rents paid by dealers for the Dealer Leased Sites were approximately$16.8 million.  Subject to rent increases under the terms ofthe franchise agreements for the 148 Dealer Leased Sites, and any changes inrent contained in any renewal franchise agreements executed for the 148 DealerLeased Sites, we expect to receive similar gross rents in connection with thefuture operation of the Dealer Leased Sites.

 

In2009 the Dealer Leased Sites, together with the Dealer Owned Sites (as definedbelow), sold approximately 275 million gallons of gasoline and diesel fuel.

 

Fromthe Dealer Leased Sites, we will receive revenues pursuant to the terms of thefranchise agreements from (a) rentpaid by the dealers, and (b) thewholesale supply of branded gasoline and diesel fuel sold to the Dealer LeasedSites.  All revenues at the Dealer LeasedSites relating to (a) the saleof branded gasoline and diesel fuels to retail end-users, and (b) convenience store, car wash andother ancillary sales are for the account of the dealer who leases and operatesthe location.  All station-levelemployees of each Dealer Leased Site are employees of the dealer who leases andoperates the location.

 

35

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·                  42 stationsdirectly operated by a management company as discussed below (“Company OperatedSites” and, together with the Dealer Leases Sites, the “Acquired Sites”).  Simultaneously with the Acquisition, theCompany Operated Sites were transferred by us to Global Montello Group Corp. (“GMG”),our wholly owned subsidiary.  27 of theCompany Operated Sites are located in Massachusetts, 6 are located in RhodeIsland and 9 are located in New Hampshire. 28 of the Company Operated Sites are owned by GMG.  14 of the Company Operated Sites are leasedby GMG pursuant to existing lease agreements assigned to and assumed by GMG.

 

Assumingexercise by GMG of available renewal terms, the leases for the 14 CompanyOperated Sites leased by us expire between 2013 and 2038, with an averageremaining lease term of approximately 12 years. The base rent paid in 2009 for the 14 leased Company Operated Sites wasapproximately $1.5 million and approximately $330,000 was paid for real estatetaxes.  The real estate taxes paid in2009 for the 28 owned Company Operated sites was approximately $728,000.  Subject to applicable rent increases underthe terms of the leases for the 14 leased Company Operated Sites, and any realestate tax increases imposed by applicable taxing authority, we expect to incurcomparable rent and real estate tax expenses in connection with the futureoperation of the Company Operated Sites.

 

Allof the Company Operated Sites have convenience stores ranging in size from 900to 3,900 square feet, 38 of which are operated under the *On the Run*flag (see “Management Agreements,” below). 36 of the Company Operated Sites areopen 24 hours per day.  All of theCompany Operated Sites are licensed lottery agents in their respectivestates.  The 9 Company Operated Sites inNew Hampshire are licensed to sell beer and wine.  20 of the Company Operated Sites have carwashes on site.  The Company OperatedSites averaged convenience store sales in 2009 of approximately $1.0 million per site.

 

In2009 the Company Operated Sites sold approximately 95 million gallons of gasoline and diesel fuel.

 

Fromthe Company Operated Sites, we will receive revenues from (a) the wholesale supply of brandedgasoline and diesel fuel to the Company Operated Sites, (b) the sale of branded gasoline anddiesel fuel to retail end-users, and (c) conveniencestore, car wash and other ancillary sales. All station-level employees of a Company Operated Sites are employees ofGMG’s management agent, as discussed below.

 

·                  The right tosupply Mobil branded fuel to an additional 31 stations that are owned andoperated by independent dealers (“Dealer Owned Sites” and, together with theAcquired Sites, the “Sites”).  Each ofthe Dealer Owned Sites is supplied pursuant to an existing supply agreementassigned to and assumed by us.  22 of theDealer Owned Sites are located in Massachusetts, 7 are located in Rhode Islandand 2 are located in New Hampshire.  Thesupply agreements for the Dealer Owned Sites expire between 2010 and 2015, andwe intend to pursue renewals of these agreements as they mature.

 

In2009 the Dealer Owned Sites, together with the Dealer Leased Sites, soldapproximately 275 million gallons of gasoline and diesel fuel.

 

Fromthe Dealer Owned Sites, we will receive revenues solely from the wholesalesupply of branded gasoline and diesel fuel to the Dealer Owned Sites.  All revenues at the Dealer Owned Sitesrelating to (a) the sale ofbranded gasoline and diesel fuels to retail end-users, and (b) convenience store, car wash andother ancillary sales are for the benefit of the dealer who owns and operatesthe location.  All station-levelemployees of each Dealer Operated Site are employees of the independent dealerwho owns the location.

 

Webelieve the Acquired Sites are premier locations and have been wellmaintained.  All underground storage tanksystems and related dispensing equipment were inspected by us and environmentalengineers as part of due diligence activities prior to consummation of theAcquisition and are believed to be in compliance in all material respects withall applicable federal, state and local underground storage tank laws andregulations.  Our policy will be toreplace underground motor fuel storage tanks at approximately 30 years of age.  The average tank age of the undergroundstorage tanks at the Acquired Sites is approximately 19.5 years.  We do not own the underground storage tanksor other dispensing equipment at the Dealer Owned Sites.  Based on a 30-year average life replacementcycle, we expect to replace approximately 18% of the tanks in the next 5years.  All of the motor fuel storagetanks at the Acquired Sites are constructed of fiberglass reinforced plastic,with approximately 2/3 of the tanks double walled.  All 

 

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tanksat the Acquired Sites are equipped with automatic tank gauges which areremotely monitored for leak detection purposes.

 

Pursuantto the BFA (as defined below), we must maintain all buildings at each of theAcquired Sites, and must ensure that the operators maintain all buildings ateach of the Dealer Owned Sites, in compliance with all applicable fire,building and zoning codes and ordinances, in a clean condition free of debris,trash and fire hazards, and in accordance with detailed and rigorous ExxonMobilbrand imaging requirements.  We believethat each of the Sites is in compliance in all material respects with each ofthese requirements.

 

Inaddition to the contractual obligations assumed by us as described above, weassumed certain environmental liabilities with respect to the AcquiredSites.  The assumed environmentalliabilities include on-going environmental remediation at approximately 70 ofthe Acquired Sites and future remediation activities required by applicablefederal, state or local law or regulation. Based on consultations with environmental engineers, our estimated costof the remediation is expected to be approximately $30.0 million to beexpended over an extended period of time. See Note 12 of Notes to Consolidated Financial Statements.

 

Wecontemplate potential sales of Acquired Sites to franchise dealers and otherthird parties, and the possible lease of Acquired Sites to commissioned agents.A “commissioned agent” is a person who leases and operates the conveniencestore as an independent operator, with all convenience store revenues for theagent’s account.  In addition, the agentreceives a commission on a per gallon basis for the sale of fuel productsowned, priced and sold by us.  We havenot identified particular Acquired Sites for potential divestment, although weexpect to conduct preliminary discussions with individual dealers and otherinterested third parties once the post-closing integration of the AcquiredSites is completed.  All sales will be onterms and conditions acceptable to us.

 

**Brand Fee Agreement —**In connection with theAcquisition, we and ExxonMobil entered into a 15-year Brand Fee Agreement (the “BFA”),which entitles us to (a) operateeach of the Company Operated Sites under the Mobil branded trade name andrelated trade logos (the “Mobil Flag”), (b) allowthe Dealer Leased Sites and the Dealer Owned Sites to be operated under theMobil Flag (c) subject toExxonMobil’s approval, brand additional service stations (whether companyoperated, dealer leased or dealer owned) in Massachusetts, Rhode Island, NewHampshire, Maine and Vermont (collectively, the “BFA States”) under the MobilFlag and (d) supplyMobil-branded motor fuel to the Sites and other Mobil-branded stations in theBFA States.  We are responsible forcomplying, and ensuring compliance by all third parties purchasingMobil-branded motor fuel from us within the BFA States, with all of ExxonMobil’sbranded facility requirements, brand image specifications and restrictions andminimum service standards with respect to the use of the Mobil Flag and thesale of Mobil-branded motor fuel.  Inaddition, on and after June 1,2011, we will have similar rights and responsibilities with respect to theExxon branded trade name and related trade logos (the “Exxon Flag”) in the BFAStates.

 

Weare responsible for securing our own wholesale fuel supply, including sourcingand delivery of motor fuel and ExxonMobil proprietary additives, arranging forstorage and distribution at and from bulk storage facilities and installing anynecessary additive injection systems, and providing dispatch and distributionsystems for delivery of fuel to the Sites and any other Mobil-branded stationsupplied by us in the BFA States during the term of the BFA.  We are also responsible for ensuring that anyMobil-branded motor fuel distributed by us within the BFA States meetsExxonMobil’s specifications and quality assurance requirements forMobil-branded motor fuel, as such specifications and requirements may bechanged by ExxonMobil from time to time, as well as all applicable federal,state and local laws and regulations. Except for a brief transition period,ExxonMobil will not supply motor fuels to us within the BFA States.  The Acquisition did not include any ofExxonMobil’s existing supply arrangements, terminal assets, rolling stock orother storage and distribution system components.

 

Securingwholesale fuel supply is part of our core business.  Our products come from some of the majorenergy companies in the world.  Cargos aresourced from the United States, Canada, South America, Europe and occasionallyfrom Asia.  During 2009, we purchased anaverage of approximately 222,000 barrels per day of refined petroleumproducts from approximately 105 suppliers. In 2009, our top ten suppliers accounted for approximately 63% ofproduct purchases.  We enter into supplyagreements with these suppliers on a term basis or a spot basis.

 

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Wewill utilize portions of our existing terminal network to supply theSites.  This terminal network includesbulk terminals owned by us or at which we maintain dedicated storage as well asthroughput or exchange agreements at other bulk terminals.  Throughput arrangements allow storage ofproduct at terminals owned by others.  Wecan load product at these terminals, and pay the owners of these terminals feesfor services rendered in connection with the receipt, storage and handling ofsuch product.  Exchange agreements alsoallow us to take delivery of product at a terminal or facility that is notowned or leased.  An exchange is acontractual agreement where the parties exchange product at their respectiveterminals or facilities.  For example, wereceive product that is owned by the exchange partner from such party’sfacility or terminal, and we deliver the same volume of product to such partyout of one of the terminals in our terminal network.  Initially, we intend to supply the Sitespursuant to throughput agreements at two bulk terminals and an exchangeagreement at one bulk terminal, each of which currently have the necessaryMobil proprietary additive available.  Wecan supply the Sites using additional bulk terminals in our terminal network,subject to potential modifications to accommodate the storage and injection ofMobil proprietary additive as required by the BFA.  Consistent with our other operations, thebulk supply required for the Sites and other locations supplied pursuant to theBFA are substantially hedged through futures contracts and swap agreements.

 

Pursuantto the BFA, we have the right (but not the obligation) to continue operatingthe Sites under the Mobil Flag.  Inaddition, on and after June 1,2011, we will have similar rights with respect to the Exxon Flag.  We will pay a fee of approximately $9.0million to ExxonMobil in 2011 for this right, plus an additional amount in theevent additional sites are branded Mobil or Exxon or supplied Mobil or Exxonbranded fuel by us pursuant to the BFA. Initially, we intend to continue operating the Sites under the Mobilbrand, although we have the right to rebrand the Sites to another majorgasoline brand or to operate the Sites as unbranded stations.  In the event we rebrand any of the Sites toanother major gasoline brand or to an unbranded station, the BFA fee will notdecrease.

 

ExxonMobilhas agreed to provide credit card processing services for the Sites and anyother stations branded or supplied by us in the BFA States pursuant to theBFA.  We are responsible for providingour own marketing and promotion efforts in support of the Mobil and Exxonbrands within the BFA States.  We expectto benefit from national promotions of the Mobil (and, after June 1, 2011, Exxon) brand byExxonMobil.  We are responsible forproviding our own customer service operations to respond to consumer complaintsor concerns regarding the operation of the Sites and other stations branded orsupplied by us under the BFA.  Inaddition, ExxonMobil operates and offers a variety of incentive and rebateprograms for franchise dealers and other wholesale distributors which, prior tothe Acquisition, were available to the Sites. Under the BFA, these programs are not available to us, and we will beresponsible for developing, offering and administering any such program we wishto offer to any of the Sites.

 

**Management Agreements —**In connection with theAcquisition, we and GMG entered into Facilities Management Agreements (each, a “ManagementAgreement”) with Alliance Energy LLC (“Alliance”) with respect to all ofthe Sites.  Alliance is approximately 95%owned by members of the Slifka family, who also own our general partner.  Each Management Agreement is for an initialterm continuing through September 30, 2013.  Either party to each Management Agreement mayextend the term for consecutive additional one-year terms by giving writtennotice of its election to extend the term not less than twenty-four monthsprior to the expiration of the then current term, subject to the parties’mutual agreement on the management fee for such extension.

 

Pursuantto the Management Agreements, Alliance will supervise and direct the day-to-daymanagement and operations of the Sites for an aggregate annual management feeof $2.6 million, commencing October 1, 2010.  Alliance will manage the operations of theSites in accordance with annual budgets to be approved by us and GMG,respectively.  In addition to the annualmanagement fee, we and GMG are responsible for reimbursing Alliance for certaindirect overhead expenses related to the operations of the Sites, includingcosts relating to the employees directly employed to manage and operate theSites and a portion of the costs relating to certain administrative personnelof Alliance as may be approved by us and/or GGM, in accordance with the ManagementAgreements and the approved annual budgets. In the event that the number ortype of Mobil or Exxon branded stations in the BFA States changes, the annualmanagement fee and reimbursed direct overhead expenses may be adjusted as theparties mutually agree.

 

Inconnection with the Acquisition, all of ExxonMobil’s station-level employees atthe Company Operated Sites and ExxonMobil’s 13 field supervisory and supportemployees responsible for the Sites were hired by Alliance.  The aggregate cost of salary and benefits in2009 for station-level employees at the Company Operated Sites wasapproximately $9.5 million,exclusive of field supervisory and support employees.  As we may operate the Company Operated Sitesin a manner different than ExxonMobil, the aggregate cost of salary andbenefits for station-level employees at the Company Operated Sites may begreater or less than the amounts incurred by ExxonMobil.  All matters pertaining to the employment,supervision, compensation, promotion, and discharge of such employees are the 

 

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responsibilityof Alliance.  Pursuant to the ManagementAgreements, Alliance is required to indemnify us and Global Montello from andagainst any and all claims and damages of any nature whatsoever arising out ofor incidental to Alliance’s performance of its responsibilities under theManagement Agreements caused by or due to fraud, gross negligence, willfulmisconduct or a material breach by Alliance of any provision of the ManagementAgreements.  Alliance’s aggregateliability is capped at $5.0 million, over and above the utilization of anyand all insurance proceeds.

 

Inaddition, pursuant to the Management Agreements, Alliance is providing certainaccounting, tax, information technology, legal, maintenance, environmental andregulatory, dispatch, credit, human resource, construction and other servicesnot acquired as part of the Acquisition. Additional accounting, tax, information technology, legal, environmentaland regulatory, credit and other services not acquired as part of theAcquisition and not otherwise provided by Alliance pursuant to the ManagementAgreements will be provided by our workforce. In addition, we will be solely responsible for providing all necessary employeesand services relating to any wholesale fuel supply, including sourcing anddelivery of physical product and ExxonMobil proprietary additives, andarranging for storage at and distribution from bulk storage facilities andinstalling any necessary additive injection systems, as these services were notacquired as part of the Acquisition.  TheExxonMobil employees who previously provided the services being provided by uswith respect to these activities were not available for hire as part of theAcquisition.

 

Alliance,as management agent for GMG, has obtained the right to continue operating 38 ofthe Company Operated Sites under the current *On the Run*convenience store brand, as the Acquisition did not include ExxonMobil’s rightsto use this brand name.  We have theright to rebrand the convenience stores at the Company Operated Sites toanother brand in the future.  Inaddition, we did not acquire any of ExxonMobil’s existing supply contracts withconvenience store vendors, and Alliance, as management agent, is responsiblefor entering into new arrangements with suppliers to stock the conveniencestores at the Company Operated Sites. Subject to approval under the BFA, dealers at Dealer Leased Sites and atDealer Owned Sites are responsible for obtaining any necessary rights to anyconvenience store brand name for these sites as well as entering into anydesired supply contracts with convenience store vendors directly.

 

**Other ExxonMobil Relationships —**ExxonMobil has long-termthroughput contracts with us for the use of five refined products terminalsacquired from ExxonMobil in 2007.  Wesupply refined products to ExxonMobil at each of these terminals.  ExxonMobil is also a supplier of refinedproducts to us at other locations. ExxonMobil accounted for approximately 22% and 20% of our consolidatedsales for the three and nine months ended September 30, 2010, respectively, and 22% of our consolidated salesfor the year ended December 31, 2009.

 

***Products and Operational Structure***

 

Ourproducts include gasoline, distillates and residual oil.  We sell gasoline to unbranded and brandedretail gasoline stations 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 currently divided into two reporting segments:

 

·              *Wholesale.*  This segmentincludes sales of gasoline, distillates and residual oil to unbranded andbranded retail gasoline stations and other resellers of transportation fuels,home heating oil retailers and wholesale distributors.

 

·              *Commercial.*  This segment includes sales anddeliveries of unbranded and branded gasoline, distillates, residual oil andsmall amounts of natural gas to end user customers in the public sector and tolarge commercial and industrial end user customers, primarily either through acompetitive bidding process or through contracts of various terms.  This segment also purchases, custom blends,sells and delivers bunker fuel and diesel to cruise ships, bulk carriers andfishing fleets generally by barges.

 

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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 Reporton Form 10-K for the year ended December 31, 2009 for additionalinformation related to commodity risk.

 

***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 adverselyaffect our liquidity. *In the recentpast, world financial markets experienced a severe reduction in theavailability of credit.  Although we werenot negatively impacted by this condition, possible negative impacts in thefuture could include a decrease in the availability of borrowings under ourcredit agreement, increased counterparty credit risk on our derivativescontracts and our contractual counterparties requiring us to providecollateral.  In addition, we couldexperience a tightening of trade credit from our suppliers.

 

·              *Wecommit substantial resources to pursuing acquisitions, though there is nocertainty that we will successfully complete any acquisitions or receive theeconomic results we anticipate from completed acquisitions.*  Consistentwith our business strategy, we are continuously engaged in discussions withpotential sellers of terminalling, storage and/or marketing assets and relatedbusinesses.  In an effort to prudentlyand economically leverage our asset base, knowledge base and skill sets,management pursues businesses that are closely related to or significantlyintertwined with our existing lines of business.  Our growth largely depends on our ability tomake accretive acquisitions.  We may beunable to make such accretive acquisitions for a number of reasons, including,but not limited to, the following: (1) we are unable to identify attractive acquisition candidates ornegotiate acceptable purchase contracts; (2) we are unable to raisefinancing for such acquisitions on economically acceptable terms; or (3) weare outbid by competitors.  In addition,we may consummate acquisitions that at the time of consummation we believe willbe accretive, but that ultimately may not be accretive.  If any of these events were to occur, ourfuture growth would be limited.  We cangive no assurance that our acquisition efforts will be successful or that anysuch acquisition will be completed on terms that are favorable to us.

 

·              *Our financial results are generally better in thefirst and fourth quarters of the calendar year. *Demand for some refinedpetroleum products, specifically home heating oil and residual oil for spaceheating purposes, is generally higher during November through March thanduring April through October.  Weobtain a significant portion of these sales during these winter months.  Therefore, our results of operations for thefirst and fourth calendar quarters are generally better than for the second andthird quarters.  With lower cash flowduring the second and third calendar quarters, we may be required to borrowmoney in order to maintain current levels of distributions to our unitholders.

 

·              *Warmer weather conditions could adversely affect ourresults of operations and financial condition. *Weather conditions generallyhave an impact on the demand for both home heating oil and residual oil.  Because we supply distributors whosecustomers depend on home heating oil and residual oil for space heatingpurposes during the winter, warmer-than-normal temperatures during the firstand fourth calendar quarters in the Northeast can decrease the total volume wesell and the gross profit realized on those sales.

 

·              *Energy efficiency, new technology and alternativefuels could reduce demand for our products.*

 

·              Increased conservation and technological advances have adverselyaffected the demand for home heating oil and residual oil.  Consumption of residual oil has steadilydeclined over the last three decades.  Wecould face additional competition from alternative energy sources as a resultof future government-mandated controls or regulation further promoting the useof cleaner fuels.  End users who aredual-fuel users have the ability to switch between residual oil and naturalgas.  Other end users may elect toconvert to natural gas.  During a periodof increasing residual oil prices relative to the prices of natural gas, dual-

 

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fuel customers may switchand other end users may convert to natural gas. Residential users of home heating oil may also convert to naturalgas.  Such switching or conversion couldhave an adverse effect on our results of operations and financial condition.

 

·              New technologies and alternative fuel sources, such as electric, hybridor battery powered motor vehicles, could reduce the demand for gasoline andadversely impact our gasoline sales.  Areduction in gasoline sales could have an adverse effect on our results ofoperations and financial condition.

 

·              *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*.  Resultsfrom our purchasing, storing, terminalling and selling operations are influencedby prices for refined petroleum products, pricing volatility and the market forsuch products.  Prices in the overallforward market for refined petroleum products may impact our ability to executeadvantageous purchasing opportunities. In a contango market (when product prices for future deliveries arehigher than for current deliveries), we may use our storage capacity to improveour margins by storing products we have purchased at lower prices in thecurrent market for delivery to customers at higher prices in the future.  In a backwardated market (when product pricesfor future deliveries are lower than current deliveries), we attempt tominimize our inventories to reduce commodity risk and maintain or increase netproduct margins.  When prices for refinedpetroleum products rise, some of our customers may have insufficient credit topurchase supply from us at their historical purchase volumes, and theircustomers, in turn, may adopt conservation measures which reduce consumption,thereby reducing demand for product. Furthermore, when prices increase rapidly and dramatically, we may beunable to promptly pass our additional costs to our customers, resulting inlower margins for us which could adversely affect our results ofoperation.  Lastly, higher prices forrefined petroleum products may (1) diminish our access to trade creditsupport and/or cause it to become more expensive and (2) decrease theamount of borrowings available for working capital under our credit agreementas a result of total available commitments, borrowing base limitations andadvance rates thereunder.  In addition,when prices for refined petroleum products decline, our exposure to risk ofloss in the event of nonperformance by our customers of our forward contractsmay be increased as they and/or their customers may breach their contracts andpurchase refined petroleum products at the then lower spot and/or retail marketprice.  Furthermore, lower prices forrefined petroleum products may diminish the amount of borrowings available forworking capital under our working capital revolving credit facility as a resultof borrowing base limitations.

 

·              *Changes in government usage mandates and taxcredits could adversely affect the availability and pricing of ethanol, whichcould negatively impact our gasoline sales.*  Future demand for ethanol will be largelydependent upon the economic incentives to blend based upon the relative valueof gasoline and ethanol, taking into consideration the Volumetric EthanolExcise Tax Credit (the “blender’s credit”) and the EPA’s regulations on theRenewable Fuel Standard (“RFS”) program. A reduction or waiver of the RFSmandate or the failure to extend the blender’s credit could adversely affectthe availability and pricing of ethanol, which in turn could adversely affectour future sales.

 

·              *New,stricter environmental laws and regulations could significantly increase ourcosts, which could adversely affect our results of operations and financialcondition.*  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.

 

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**Results ofOperations**

 

***Evaluating Our Results of Operations***

 

Our management uses a variety of financial andoperational measurements to analyze our performance.  These measurements include:(1) net product margin, (2) gross profit, (3) selling, generaland administrative expenses (“SG&A”), (4) operating expenses,(5) degree days, (6) net income per diluted limited partner unit,(7) earnings before interest, taxes, depreciation and amortization (“EBITDA”)and (8) distributable cash 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 and branded gasoline, distillates, residual oil and naturalgas.  Product costs include the cost ofacquiring the refined petroleum products and natural gas that we sell and allassociated costs including shipping and handling costs to bring such productsto the point of sale.  Net product marginis a non-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 and branded gasoline, distillates,residual oil and natural gas.  Productcosts include the cost of acquiring the refined petroleum products and naturalgas that we sell and all associated costs to bring such products to the pointof sale.

 

*Selling,General and Administrative Expenses*

 

OurSG&A expenses include, among other things, marketing costs, corporateoverhead, employee salaries and benefits, pension and 401(k) planexpenses, discretionary bonuses, non-interest financing costs, professionalfees and information technology expenses. Employee-related expenses including employee salaries, discretionarybonuses and related payroll taxes, benefits, and pension and 401(k) planexpenses are paid by our general partner which, in turn, is reimbursed forthese 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.

 

*Degree Day*

 

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

 

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*Net Income Per Diluted Limited Partner Unit*

 

Weuse net income per diluted limited partner unit to measure our financialperformance on a per-unit basis.  Net incomeper diluted limited partner unit is defined as net income, divided by theweighted average number of outstanding diluted common and subordinated units,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:

 

·              our compliance with certain financial covenantsincluded in our debt agreements;

 

·              our financial performance without regard tofinancing methods, capital structure, income taxes or historical cost basis;

 

·              our ability to generate cash sufficient to payinterest on our indebtedness and to make distributions to our partners;

 

·              our operating performance and return on investedcapital as compared to those of other companies in the wholesale, marketing anddistribution of refined petroleum products, without regard to financing methodsand capital structure; and

 

·              the viability of acquisitions and capitalexpenditure projects and the overall rates of return of alternative investmentopportunities.

 

EBITDAshould not be considered as an alternative to net income, operating income,cash flow from operating activities or any other measure of financialperformance or liquidity presented in accordance with GAAP.  EBITDA excludes some, but not all, items thataffect net income, and this measure may vary among other companies.  Therefore, EBITDA may not be comparable tosimilarly titled measures of other companies.

 

*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.  In December 2009,we amended our partnership agreement to restate the provisions governingconversion of the subordinated units to use distributable cash flow to testwhether we have “earned” the minimum quarterly distribution.  Distributable cash flow means our net incomeplus depreciation and amortization minus maintenance capital expenditures, aswell as adjustments to eliminate items approved by the audit committee of theboard of directors of our general partner that are extraordinary ornon-recurring in nature and that would otherwise increase distributable cashflow.  Specifically, this financialmeasure indicates to investors whether or not we have generated sufficientearnings on a current or historic level that can sustain or support an increasein our quarterly cash distribution. Distributable cash flow is a quantitative standard used by theinvestment community with respect to publicly traded partnerships.  Distributable cash flow should not beconsidered as an alternative to net income, cash flow from operations, or anyother measure of financial performance presented in accordance with GAAP.  In addition, our distributable cash flow maynot be comparable to distributable cash flow or similarly titled measures ofother companies.

 

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***Three and Nine Months Ended September 30, 2010 and 2009***

 

Duringthe three and nine months ended September 30, 2010, we experienced thefollowing events:

 

·                     Refined petroleum productprices increased during the three and nine months ended September 30, 2010compared to the same periods in 2009.

 

·                     Our third quarter 2010gasoline margin improved compared to the first quarter of 2010.  The first quarter of 2010 was marked bysignificant margin pressure in the gasoline market compared to the firstquarter of 2009.

 

·                     Temperatures for the threemonths ended September 30, 2010 were 65% warmer than normal and 68% warmerthan the third quarter of 2009. Temperatures for the nine months ended September 30, 2010 were 16%warmer than normal and 17% warmer than the comparable period in 2009.

 

·                     Our reserve for creditlosses for the three and nine months ended September 30, 2010 was less by$0.3 million and $1.1 million, respectively, compared to thecomparable periods in 2009.

 

·                     Our total volume increasedby approximately 10% for the third quarter ended September 30, 2010compared to the same period in 2009 primarily due to our gasolinebusiness.  Our total volume decreased byapproximately 3% for the nine months ended September 30, 2010 compared tothe same period in 2009 primarily due to warmer weather.

 

·                     We believe heating oilconservation continued during the three and nine months endedSeptember 30, 2010.

 

Thefollowing table provides the prices of and percentage increases in refinedpetroleum product and natural gas prices at the end of the first three quartersin 2010 as compared to each comparable quarter in 2009:

 
| **Period:**                 | ** ** | **Heating  Oil**$ per  gallon(1) | ** ** | **Gasoline**$ per  gallon(1) | ** ** | **Residual  Oil**$ per  gallon(2) | ** ** | **Natural  Gas**$ per gallon  equivalent(3) |
|-----------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|
| ** **                  | ** ** | ** **                            | ** ** | ** **                        | ** ** | ** **                             | ** ** | ** **                                       |
| At  March 31, 2009          |       | $1.34                                 |       | $1.40                             |       | $0.95                                  |       | $0.62                                            |
| At  March 31, 2010          |       | $2.16                                 |       | $2.31                             |       | $1.76                                  |       | $0.63                                            |
| Change                      |       | 61%                                   |       | 65%                               |       | 85%                                    |       | 2%                                               |
|                        |       |                                  |       |                              |       |                                   |       |                                             |
| At  June 30, 2009           |       | $1.72                                 |       | $1.90                             |       | $1.49                                  |       | $0.62                                            |
| At  June 30, 2010           |       | $1.98                                 |       | $2.06                             |       | $1.61                                  |       | $0.75                                            |
| Change                      |       | 15%                                   |       | 8%                                |       | 8%                                     |       | 21%                                              |
|                        |       |                                  |       |                              |       |                                   |       |                                             |
| At  September 30, 2009 |       | $1.80                                 |       | $1.73                             |       | $1.50                                  |       | $0.54                                            |
| At  September 30, 2010 |       | $2.24                                 |       | $2.04                             |       | $1.74                                  |       | $0.62                                            |
| Change                      |       | 24%                                   |       | 18%                               |       | 16%                                    |       | 15%                                              |
|                        |       |                                  |       |                              |       |                                   |       |                                             |

 

(1)  Source:  New York Mercantile Exchange(closing price)

(2)  Source:  Platts Oilgram Price Report (6-1% New YorkHarbor; average)

(3)  Source:  Platts Gas Daily Report (Tennessee zonedelivered)

 

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***Key Performance 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** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                             |       | $                                | 551        |                            | $          | 2,059 |   | $ | 21,099 |   | $ | 21,900 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net income per diluted limited partner unit (1)        |       | $                                | 0.03       |                            | $          | 0.15 |   | $ | 1.28 |   | $ | 1.60 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| EBITDA (2)                                             |       | $                                | 12,526     |                            | $          | 9,980 |   | $ | 50,473 |   | $ | 45,932 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Distributable cash flow (3)                            |       | $                                | 5,433      |                            | $          | 4,978 |   | $ | 33,498 |   | $ | 30,262 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| **Wholesale Segment:**                                 |       |                             |       |                            |       |   |   |   |   |
| Volume (gallons)                                       |       | 715,362                          |       | 650,983                         |       | 2,288,428 |   | 2,372,373 |   |
| Sales                                                  |       |                             |       |                            |       |   |   |   |   |
| Distillates                                            |       | $                                | 376,878    |                            | $          | 329,362 |   | $ | 1,778,730 |   | $ | 1,741,038 |   |
| Gasoline                                               |       | 1,066,764                        |       | 871,770                         |       | 2,929,257 |   | 2,093,759 |   |
| Residual oil                                           |       | 8,505                            |       | 6,594                           |       | 28,902 |   | 23,937 |   |
| Total                                                  |       | $                                | 1,452,147  |                            | $          | 1,207,726 |   | $ | 4,736,889 |   | $ | 3,858,734 |   |
| Net product margin (4)                                 |       |                             |       |                            |       |   |   |   |   |
| Distillates                                            |       | $                                | 18,440     |                            | $          | 15,456 |   | $ | 58,920 |   | $ | 62,786 |   |
| Gasoline                                               |       | 16,412                           |       | 10,999                          |       | 48,333 |   | 34,912 |   |
| Residual oil                                           |       | 1,864                            |       | 1,814                           |       | 7,154 |   | 6,928 |   |
| Total                                                  |       | $                                | 36,716     |                            | $          | 28,269 |   | $ | 114,407 |   | $ | 104,626 |   |
| **Commercial Segment:**                                |       |                             |       |                            |       |   |   |   |   |
| Volume (gallons)                                       |       | 54,521                           |       | 46,728                          |       | 176,633 |   | 167,989 |   |
| Sales                                                  |       | $                                | 94,692     |                            | $          | 77,605 |   | $ | 309,396 |   | $ | 260,701 |   |
| Net product margin (4)                                 |       | $                                | 2,318      |                            | $          | 3,717 |   | $ | 10,040 |   | $ | 11,241 |   |
| **Combined sales and net product  margin:**            |       |                             |       |                            |       |   |   |   |   |
| Sales                                                  |       | $                                | 1,546,839  |                            | $          | 1,285,331 |   | $ | 5,046,285 |   | $ | 4,119,435 |   |
| Net product margin (4)                                 |       | $                                | 39,034     |                            | $          | 31,986 |   | $ | 124,447 |   | $ | 115,867 |   |
| Depreciation allocated to cost of sales                |       | 3,939                            |       | 2,713                           |       | 9,623 |   | 8,091 |   |
| **Combined gross profit**                              |       | $                                | 35,095     |                            | $          | 29,273 |   | $ | 114,824 |   | $ | 107,776 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| **Weather conditions:**                                |       |                             |       |                            |       |   |   |   |   |
| Normal heating degree days                             |       | 96                               |       | 96                              |       | 3,750 |   | 3,750 |   |
| Actual heating degree days                             |       | 34                               |       | 105                             |       | 3,161 |   | 3,798 |   |
| Variance from normal heating degree days               |       | (65%                             | )          | 9%                              |       | (16% | ) | 1% |   |
| Variance from prior period actual heating degree  days |       | (68%                             | )          | 35%                             |       | (17% | ) | 8% |   |

 

----

(1)            See Note 2 of Notes to Consolidated FinancialStatements for net income per diluted limited partner unit calculation.

(2)            EBITDA is a non-GAAP financial measurewhich is discussed above under “—Evaluating Our Results of Operations.”  The table below presents reconciliations ofEBITDA to the most directly comparable GAAP financial measures.

(3)            Distributable cash flow is a non-GAAPfinancial measure which is discussed above under “—Evaluating Our Results ofOperations.”  The table below presentsreconciliations of distributable cash flow to the most directly comparable GAAPfinancial measures.

(4)            Net product margin is a non-GAAP financialmeasure which is discussed above under “—Evaluating Our Results of Operations.”  The table above reconciles net product marginon a combined basis to gross profit, a directly comparable GAAP financialmeasure.

 

45

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Thefollowing table presents reconciliations of EBITDA to the most directlycomparable GAAP financial measures on a historical basis for each periodpresented (in thousands):

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Reconciliation of net income to  EBITDA:**                                          |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                            |       | $                                | 551        |                            | $          | 2,059 |   | $ | 21,099 |   | $ | 21,900 |   |
| Depreciation and amortization and amortization of  deferred financing fees            |       | 6,087                            |       | 3,979                           |       | 14,661 |   | 12,017 |   |
| Interest expense                                                                      |       | 5,888                            |       | 3,742                           |       | 14,326 |   | 10,940 |   |
| Income tax expense                                                                    |       | —                           |       | 200                             |       | 387 |   | 1,075 |   |
| EBITDA                                                                                |       | $                                | 12,526     |                            | $          | 9,980 |   | $ | 50,473 |   | $ | 45,932 |   |
|                                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Reconciliation  of net cash (used in) provided by operating activities to EBITDA:** |       |                             |       |                            |       |   |   |   |   |
| Net cash (used in) provided by operating  activities                                  |       | $                                | (83,522    | )                               | $          | 5,597 |   | $ | (32,958 | ) | $ | 25,778 |   |
| Net changes in operating assets and liabilities  and certain non-cash items           |       | 90,160                           |       | 441                             |       | 68,718 |   | 8,139 |   |
| Interest expense                                                                      |       | 5,888                            |       | 3,742                           |       | 14,326 |   | 10,940 |   |
| Income tax expense                                                                    |       | —                           |       | 200                             |       | 387 |   | 1,075 |   |
| EBITDA                                                                                |       | $                                | 12,526     |                            | $          | 9,980 |   | $ | 50,473 |   | $ | 45,932 |   |

 

Thefollowing table presents reconciliations of distributable cash flow to the mostdirectly comparable GAAP financial measures on a historical basis for eachperiod presented (in thousands):

 
| ** **                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Reconciliation of net income to  distributable****cash flow:**                                        |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                                              |       | $                                | 551        |                            | $          | 2,059 |   | $ | 21,099 |   | $ | 21,900 |   |
| Depreciation and amortization and amortization of  deferred financing fees                              |       | 6,087                            |       | 3,979                           |       | 14,661 |   | 12,017 |   |
| Maintenance capital expenditures                                                                        |       | (1,205                           | )          | (1,060                          | )          | (2,262 | ) | (3,655 | ) |
| Distributable cash flow                                                                                 |       | $                                | 5,433      |                            | $          | 4,978 |   | $ | 33,498 |   | $ | 30,262 |   |
|                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| **Reconciliation  of net cash (used in) provided by operating activities to distributable cash  flow:** |       |                             |       |                            |       |   |   |   |   |
| Net cash (used in) provided by operating  activities                                                    |       | $                                | (83,522    | )                               | $          | 5,597 |   | $ | (32,958 | ) | $ | 25,778 |   |
| Net changes in operating assets and liabilities  and certain non-cash items                             |       | 90,160                           |       | 441                             |       | 68,718 |   | 8,139 |   |
| Maintenance capital expenditures                                                                        |       | (1,205                           | )          | (1,060                          | )          | (2,262 | ) | (3,655 | ) |
| Distributable cash flow                                                                                 |       | $                                | 5,433      |                            | $          | 4,978 |   | $ | 33,498 |   | $ | 30,262 |   |

 

46

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***Consolidated Results***

 

Ourtotal sales for the third quarter of 2010 increased by $261.5 million, or20%, to $1,546.8 million compared to $1,285.3 million for the sameperiod in 2009.  The increase was driven primarily by our June 2010acquisition of the Warex Terminals (see Note 11 of Notes to ConsolidatedFinancial Statements) as well as higherrefined petroleum product prices for the three months ended September 30, 2010 compared to the same period in2009.  Our aggregate volume of productsold increased by approximately 72 million gallons, or 10%, to 770** **million gallons.  The increase in volume primarily includes anincrease of approximately 64 million gallons in gasoline.  Wealso experienced an increase of 1 million gallons in distillates, despite significantly warmertemperatures during the third quarter of 2010 compared to the same period in2009, increased competition in the marketplace, continued conservation andeconomic conditions.  The number of actual heating degree daysdecreased by 68% to 34 for the three months ended September 30, 2010 compared with 105 for the sameperiod in 2009.  Our gross profitfor the third quarter of 2010 was $35.1** **million,an increase of $5.8** **million,or 20%, compared to $29.3** **millionfor the same period in 2009, due primarily to strong unit margins for bothgasoline and distillate products.

 

Ourtotal sales for the nine months ended September** **30,2010 increased by $926.8 million, or 22%, to $5,046.3 millioncompared to $4,119.4 million for the same period in 2009.  Theincrease was driven primarily by higher refined petroleum product and naturalgas prices for the nine months ended September 30, 2010 compared to the same period in2009.  Our aggregate volume of productsold decreased by approximately 75 million gallons, or 3%, to 2,465** **million gallons.  The decrease in volume primarily includesdecreases of approximately 209 million gallons and 21 million gallons in distillates and residual oil, respectively, attributable tosignificantly warmer temperatures during the first nine months of 2010compared to the same period in 2009, increased competition in the marketplace,continued conservation and economic conditions. The number of actual heatingdegree days decreased 17% to 3,161 for the nine months ended September 30, 2010 compared with 3,798 for the sameperiod in 2009.  The overalldecrease in volume sold was offset by a 130** **milliongallon increase in gasoline.  Our gross profit for the nine monthsended September 30, 2010 was $114.8** **million,an increase of $7.0** **million,or 6%, compared to $107.8** **millionfor the same period in 2009, due primarily to strong unit margins for bothgasoline and distillate products.

 

*WholesaleSegment*

 

Distillates.  Wholesaledistillate sales for the three months ended September 30, 2010 were$376.8 million compared to $329.3 million for the three months endedSeptember 30, 2009.  During the firstnine months of 2010, wholesale distillate sales were $1,778.7 millioncompared to $1,741.0 million for the same period in 2009.  The increases of $47.5 million, or 14%,and $37.7 million, or 2%, were primarily due to increased refinedpetroleum product prices.

 

Ournet product margin from distillate sales increased by $3.0 million, or19%, to $18.4 million for the three months ended September 30, 2010due to favorable buying opportunities and strong unit margins.  During the nine months ended September 30,2010, we had a 209 million gallon decrease in volume sold due to significantly warmer temperatures compared to thesame period in 2009, increased competition in the marketplace, continuedconservation and economic conditions. Primarily for the same reasons, our net product margin from distillatesales decreased by $3.9 million, or 6%, to $58.9 million for the ninemonths ended September 30, 2010 compared the same period in 2009.

 

Gasoline.  Wholesalegasoline sales for the three months September 30, 2010 were$1,066.8 million compared to $871.8 million for the same period in2009.  During the first nine months of2010, wholesale gasoline sales were $2,929.3 million compared to$2,093.8 million for the same period in 2009.  The increases of $195.0 million, or22%, and $835.5 million, or40%, were due primarily to our June 2010 acquisition of the WarexTerminals (see Note 11 of Notes to Consolidated Financial Statements) as well as higher gasoline prices andincreases in gasoline volume sold compared to the prior periods.  Theincreases in gasoline volume were primarily due to our acquisition of the WarexTerminals.  Our net product marginfrom gasoline sales increased by $5.4 million to $16.4 million forthe three months ended September 30, 2010 and by $13.4 million to$48.3 million for the nine months ended September 30, 2010 comparedto the same periods in 2009.  Theseincreases were primarily attributable to improved unit margins and increases ingasoline volume sold for the three and nine months ended September 30,2010 compared to the same periods in 2009.

 

47

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Residual Oil.  Wholesaleresidual oil sales for the three months ended September 30, 2010 were$8.5 million compared to $6.6 million for the three months endedSeptember 30, 2009.  During thefirst nine months of 2010, residual oil sales were $28.9 million comparedto $23.9 million for the same period in 2009.  The increases of $1.9 million, or 29%,and $5.0 million, or 21%, were primarily due to the increase in refinedpetroleum product prices.  For the firstnine months of 2010, we experienced a decrease in residual oil volume sold,primarily due to warmer temperatures compared to the same period in 2009, continuedconservation, challenging economic conditions, system conversions and fuelswitching due to the comparative price advantage of natural gas over residualoil.  Our net product margin contributions from residual oil salesslightly increased to $1.9 million and $7.2 million for the three andnine months ended September 30, 2010, respectively, compared to$1.8 million and $6.9 million for the three and nine months endedSeptember 30, 2009, respectively.

 

*CommercialSegment*

 

Inour Commercial segment, residual oil accounted for approximately 59% and 60% oftotal commercial volume sold for the three months ended September 30, 2010and 2009, respectively, and approximately 56% and 62% for the nine months endedSeptember 30, 2010 and 2009, respectively. Distillates, gasoline and natural gas accounted for the remainder of thetotal volume sold.

 

Commercialresidual oil sales increased by approximately 24% due to a 16% increase involume sold and increased refined petroleum product prices for the three monthsended September 30, 2010. Commercial residual oil sales increased by approximately 19% for thenine months ended September 30, 2010, despite a 5% decrease in volumesold.  We attribute the decrease involume sold to the competitive pricing from natural gas and reductions inproduction by certain industry participants in our markets.

 

*Selling, General and Administrative Expenses*

 

SG&Aexpenses increased by $3.4 million, or 24%, to $17.2 million for thethree months ended September 30, 2010 compared to $13.8 million forthe same period in 2009.  The increasewas primarily due to increases of $1.1 million in bank fees andamortization of deferred financing fees largely related to the expansions ofour bank facilities, $1.1 million in incentive compensation,$0.9 million in salaries and $0.8 million of one-time closing costsassociated with the September 2010 acquisition of retail gas stations fromExxonMobil (see Note 11 of Notes to Consolidated FinancialStatements).  The increase in SG&Aexpenses was offset by decreases of $0.3 million in bad debt accruals and$0.2 million in pension and 401(k) expenses.

 

SG&Aexpenses increased by $2.5 million, or 5%, to $47.7 million for thenine months ended September 30, 2010 compared to $45.2 million forthe same period in 2009.  The increasewas primarily due to increases of $3.1 million in salaries (includinginformation technology, natural gas personnel and project management),$1.9 million in bank fees and amortization of deferred financing feeslargely related to the expansions of our bank facilities, $0.4 million incosts associated with the expansion of our natural gas operations and$1.1 million in various other SG&A expenses.  The increase in SG&A expenses alsoincluded one-time increases of $1.4 million in legal, consulting and otherexpenses related to the FTC’s regulatory review of our acquisition of the WarexTerminals and $0.8 million of one-time closing costs associated with the September 2010acquisition of retail gas stations from ExxonMobil (see Note 11 of Notesto Consolidated Financial Statements for information on the acquisitions).  The increase in SG&A expenses was offsetby decreases of $4.4 million in incentive compensation, $1.2 millionin bad debt accruals and $0.6 million in pension and 401(k) expenses.

 

*OperatingExpenses*

 

Operatingexpenses increased by $1.7 million, or 20%, to $10.4 million for thethree months ended September 30, 2010 compared to $8.7 million forthe same period in 2009.  The increasewas primarily due to $0.7 million in costs related to the Warex Terminals,$0.6 million in costs related to the retail gas stations acquired fromExxonMobil (see Note 11 of Notes to Consolidated Financial Statements forinformation regarding the acquisitions) and $0.4 million in various otheroperating expenses.

 

48

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Operatingexpenses increased by $2.6 million, or 10%, to $28.9 million for thenine months ended September 30, 2010 compared to $26.3 million forthe same period in 2009.  The increasewas primarily due to $1.4 million in expenses related to the Warex Terminals,$0.6 million in costs related to the retail gas stations acquired fromExxonMobil (see Note 11 of Notes to Consolidated Financial Statements forinformation regarding the acquisitions), $0.3 million in expenses relatedto our leased storage facility in Oyster Bay (Commander) New York, and$0.3 million in various other operating expenses.

 

*Interest Expense*

 

Interestexpense for the three months ended September 30, 2010 increased by$2.1 million, or 57%, to $5.9 million compared to $3.7 millionfor the same period in 2009.  Interestexpense for the nine months ended September 30, 2010 increased by$3.4 million, or 31%, to $14.3 million compared to $10.9 millionfor the same period in 2009.  Weattribute the increase primarily to higher average balances on our workingcapital revolving credit facility from carrying higher average balances ofinventories and accounts receivable reflecting increased refined petroleumproduct prices.  Also, we had additionalborrowing costs as a result of the acquisitions of the Warex Terminals and theretail gas stations and supply rights from ExxonMobil (see Note 11 ofNotes to Consolidated Financial Statements). In addition, the costs of borrowings under the credit agreement wereincreased in connection with the May 14, 2010 and August 18, 2010 amendments to thecredit agreement.

 

**Liquidityand Capital Resources**

 

***Liquidity***

 

Ourprimary liquidity needs are to fund our working capital requirements, capitalexpenditures and distributions.  Cashgenerated from operations and our working capital revolving credit facilityprovide our primary sources of liquidity. Working capital increased by $93.0 million to $388.2 millionat September 30, 2010 compared to $295.2 million at December 31,2009 primarily as a result of the public offering discussed below.

 

On February 12, 2010, we paida cash distribution to our common and subordinated unitholders and our generalpartner of approximately $6.5 million for the fourth quarter of 2009.  On May 14, 2010, we paid a cashdistribution to our common and subordinated unitholders and our general partnerof approximately $8.5 million for the first quarter of 2010.  On August 13, 2010, we paid a cashdistribution to our common and subordinated unitholders and our general partnerof approximately $8.5 million for the second quarter of 2010.  On October 20, 2010,the board of directors of our general partner declared a quarterly cashdistribution of $0.4950 per unit for the period from July 1, 2010 throughSeptember 30, 2010 ($1.98 per unit on an annualized basis) to our commonand subordinated unitholders of record as of the close of businessNovember 3, 2010.  We expect to paythe cash distribution of approximately $8.6 million onNovember 12, 2010.

 

On March 19, 2010, wecompleted a public offering of 3,910,000 common units at a price of $22.75 percommon unit, which included a 510,000 common unit purchase option exercised bythe underwriters.  Net proceeds wereapproximately $84.6 million,after deducting approximately $4.4 million in underwriting fees and offering expenses.  We used the net proceeds to reduceindebtedness under our credit agreement. See Note 15of Notes to Consolidated Financial Statements for additional informationrelated to the public offering.

 

OnSeptember 30, 2010, we completed our acquisition of retail gas stationsand supply rights from ExxonMobil for an aggregate purchase price ofapproximately $202.3 million.  Inaddition, we assumed certain environmental liabilities.  See Note 11 of Notes to ConsolidatedFinancial Statements for additional information on the transaction.

 

***Capital Expenditures***

 

Ourterminalling operations require investments to expand, upgrade and enhanceexisting operations and to meet environmental and operations regulations.  We categorize our capital requirements aseither maintenance capital expenditures or expansion capital expenditures.  Maintenance capital expenditures representcapital expenditures to repair or replace partially or fully depreciated assetsto maintain the operating capacity of, or revenues generated by, existingassets and extend their useful lives. Maintenance capital expenditures include expenditures required tomaintain equipment reliability, tankage and pipeline integrity and safety andto address certain environmental regulations. We anticipate that maintenance capital expenditures will be funded withcash generated by operations.  We hadapproximately $2.3 million and $3.6 million in maintenance capitalexpenditures for the nine months ended 

 

49

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September 30,2010 and 2009, respectively, which are included in capital expenditures in theaccompanying 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 or expand our existing facilities, such as projects that increase ouroperating capacity or revenues by increasing tankage, diversifying productavailability at various terminals and adding terminals.  We have the ability to fund our expansioncapital expenditures through cash from operations or our credit agreement or byissuing additional equity.  We hadapproximately $253.6 million and $4.4 million in expansion capitalexpenditures for the nine months ended September 30, 2010 and 2009,respectively.  Specifically, for the ninemonths ended September 30, 2010, expansion capital expenditures includedapproximately $248.3 million in acquisitions including $202.3 millionfor the purchase of retail gas stations and supply rights from ExxonMobil and$46.0 million in terminal acquisition costs related to the acquisition ofthe Warex Terminals (see Note 11 of Notes to Consolidated FinancialStatements).  In addition, we had$5.3 million in expansion capital expenditures which consisted of$4.1 million in costs related to our Albany, New York terminal,$0.5 million in bio-fuel conversion costs at our Chelsea, Massachusettsterminal and $0.7 million in other expansion capital expenditures, whichare included in capital expenditures in the accompanying consolidatedstatements of cash flows.  The$4.1 million in costs in Albany include costs related to our terminal andrail expansion project, a continuing program to bring previously out-of-permittanks back online, the installation of a marine vapor recovery system to allowfor loading and offloading of gasoline and ethanol and the conversion of twodistillate storage tanks to gasoline.

 

Comparatively,for the nine months ended September 30, 2009, expansion capitalexpenditures included approximately $3.2 million at the Albany, New Yorkterminal in costs related to bringing formerly out-of-permit tanks back onlineand to dock expansion, $0.9 million in additional terminal equipment atthe Providence, Rhode Island terminal, $0.2 million in automation costs atour leased storage facility in Long Island, New York and $0.1 million inother expansion capital expenditures.

 

Webelieve that we will have cash flow from operations, borrowing capacity underour credit agreement and the ability to issue additional common units and/ordebt securities to meet our financial commitments, debt service obligations,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 as well as ourability to issue additional common units and/or debt securities.

 

***Cash Flow***

 

Thefollowing table summarizes cash flow activity (in thousands):

 
| ** **                                           | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net cash (used in) provided by operating  activities |       | $                               | (32,958    | ) | $ | 25,778 |   |
| Net cash used in investing activities                |       | $                               | (255,856   | ) | $ | (8,022 | ) |
| Net cash provided by (used in) financing  activities |       | $                               | 292,744    |   | $ | (18,017 | ) |

 

Cashflow from operating activities generally reflects our net income, inventorypurchasing patterns, the timing of collections on accounts receivable, theseasonality of our business, fluctuations in refined petroleum product prices,working capital requirements and general market conditions.

 

Netcash used in operating activities was $33.0 million for the nine monthsended September 30, 2010 compared to net cash provided by operatingactivities of $25.8 million for the same period in 2009, for aperiod-over-period decrease in cash from operating activities of $58.7 million.  This decrease results primarily from thefollowing three items:

 

·              The period-over-period change in the fair value offorward fixed price contracts of approximately $171.9 million.  Specifically, the contracts supporting ourforward fixed price hedge program required margin payments of $9.9 millionto the NYMEX due to market direction inthe nine months ended September 30, 2010, while for the nine months ended September 30, 2009, similarhedging activity provided funds from the NYMEX of $162.0 million. Through the use of regulated exchanges or derivatives, we maintain aposition that is substantially hedged with respect to such inventories; offsetby:

 

50

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·              The period-over-period change in inventories ofapproximately $114.1 million.  Forthe nine months ended September 30, 2010, the increased use of funds was$65.9 million, resulting primarily from the acquisition of the WarexTerminal in June 2010 and to higher refined petroleum product pricescompared to the same period in 2009. Inventories for the nine months ended September 30, 2009 required ause of funds of $180.0 million as we elected to use our storage capacityto carry increased inventories during this period;

 

·              The period-over-period change for the nine monthsended September 30, 2010 compared to the nine months endedSeptember 30, 2009 resulted in an increase of $54.0 million inoperating cash due to an increase in accounts.

 

Netcash used in investing activities was $255.8 million for the nine monthsended September 30, 2010 compared to $8.0 million for the same periodin 2009, and included $2.3 million in maintenance capital expenditures and$253.6 million in expansion capital expenditures.  The $253.6 million includedapproximately $248.3 million in acquisitions including $202.3 millionfor the purchase of retail gas stations and supply rights from ExxonMobil and$46.0 million in terminal acquisition costs related to the acquisition ofthe Warex Terminals (see Note 11 of Notes to Consolidated FinancialStatements).  In addition, we had$5.3 million in expansion capital expenditures which consisted of$4.1 million in costs related to our Albany, New York terminal,$0.5 million in bio-fuel conversion costs at our Chelsea, Massachusettsterminal and $0.7 million in other expansion capital expenditures, whichare included in capital expenditures in the accompanying consolidatedstatements of cash flows.  The$4.1 million in costs in Albany include costs related to our terminal andrail expansion project, a continuing program to bring previously out-of-permittanks back online, the installation of a marine vapor recovery system to allowfor loading and offloading of gasoline and ethanol and the conversion of two distillatestorage tanks to gasoline. Comparatively, for the nine months ended September 30, 2009, netcash used in investing activities included $3.6 million maintenancecapital expenditures and $4.4 million in expansion capital expenditures($3.2 million at the Albany, New York terminal in costs related tobringing formerly out-of-permit tanks back online and to dock expansion,$0.9 million in additional terminal equipment at the Providence, RhodeIsland terminal, $0.2 million in automation costs at our leased storagefacility in Long Island, New York and $0.1 million in other expansioncapital expenditures).

 

Netcash provided by financing activities was $292.7 million for the ninemonths ended September 30, 2010 and included net borrowings on our creditfacilities of $231.9 million and $84.6 million in net proceeds fromour public offering of common units, offset by $23.3 million in cashdistributions to our common and subordinated unitholders and our generalpartner and $0.4 million in repurchased units held for tax obligationsrelated to units distributed under the LTIP. Comparatively, for the nine months ended September 30, 2009, netcash used in financing activities of $18.0 million primarily included $19.6 millionin cash distributions to our common and subordinated unitholders and ourgeneral partner, $3.5 million in the repurchases of common units held onour behalf pursuant to our Repurchase Program and for future satisfaction ofour General Partner’s Obligations (as defined in Note 13 of Notes to Consolidated Financial Statements) and$0.3 million in repurchased units held for tax obligations, offset by$5.4 million in net borrowings from our credit facilities.

 

***Credit Agreement***

 

OnAugust 18, 2010, we, our general partner, our operating company and ouroperating subsidiaries amended our amended and restated credit agreement.  In accordance with the credit agreement andin connection with the acquisition of retail gas stations and supply rightsfrom ExxonMobil (see Note 11 of Notes to Consolidated FinancialStatements), we requested, and certain lenders under the credit agreementagreed to, an increase in the revolving credit facility in an amount equal to$200.0 million for a total credit facility of up to $1.15 billion.  We repay amounts outstanding and reborrowfunds based on our working capital requirements and, therefore, classify as acurrent liability the portion of the working capital revolving credit facilitywe expect to pay down during the course of the year.  The long-term portion of the working capitalrevolving credit facility is the amount we expect to be outstanding during theentire year.  The credit agreement willmature on May 14, 2014.

 

Thereare two facilities under our credit agreement:

 

·              a working capital revolving credit facility to beused for working capital purposes and letters of credit in the principal amountequal to the lesser of our borrowing base and $800.0 million; and

 

·              a $350.0 million revolving credit facility tobe used for acquisitions and general corporate purposes.

 

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Inaddition, the credit agreement has an accordion feature whereby we may requeston the same terms and conditions of our then existing credit agreement, providedno Event of Default (as defined in the credit agreement) then exists, anincrease to the revolving credit facility, the working capital revolving creditfacility, or both, by up to another $200.0 million, for a total credit facilityof up to $1.35 billion.  Any suchrequest for an increase by us must be in a minimum amount of $5.0 million,and the revolving credit facility may not be increased by more than$50.0 million.  We cannot provideassurance, however, that our lending group will agree to fund any request by usfor additional amounts in excess of the total available commitments of $1.15 billion.

 

Availabilityunder our working capital revolving credit facility is subject to a borrowingbase which is redetermined from time to time and based on specific advancerates on eligible current assets.  Underthe credit agreement, our borrowings under the working capital revolving creditfacility cannot exceed the 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 general 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, ifobtained, would be on terms acceptable to us.

 

Duringthe period from January 1, 2009 through May 13, 2010, borrowingsunder the working capital revolving credit facility bore interest at(1) the Eurodollar rate plus 1.75% to 2.25%, (2) the cost of fundsrate plus 1.75% to 2.25%, or (3) the base rate plus 0.75% to 1.25%, eachdepending on the pricing level provided in the previous credit agreement, whichin turn depended upon the Combined Interest Coverage Ratio (as defined in theprevious credit agreement).  Borrowingsunder the revolving credit facility bore interest at (1) the Eurodollarrate plus 2.25% to 2.75%, (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 the pricinglevel provided in the previous credit agreement, which in turn depended uponthe Combined Interest Coverage Ratio under the previous credit agreement.

 

CommencingMay 14, 2010, borrowings under the working capital revolving creditfacility bear interest at (1) the Eurodollar rate plus 2.50% to 3.00%,(2) the cost of funds rate plus 2.50% to 3.00%, or (3) the base rateplus 1.50% to 2.00%, each depending on the pricing level provided in the creditagreement, which in turn depends upon the Utilization Amount (as defined in thecredit agreement).

 

Duringthe period from May 14, 2010 through September 7, 2010, borrowingsunder the revolving credit facility bore interest at (1) the Eurodollarrate plus 3.00% to 3.25%, (2) the cost of funds rate plus 3.00% to 3.25%,or (3) the base rate plus 2.00% to 2.25%, each depending on the pricinglevel provided in the credit agreement, which in turn depended upon theCombined Senior Secured Leverage Ratio (as defined in the creditagreement).  Commencing September 8,2010, borrowings under the revolving credit facility bear interest at(1) the Eurodollar rate plus 3.00% to 3.875%, (2) the cost of fundsrate plus 3.00% to 3.875%, or (3) the base rate plus 2.00% to 2.875%, eachdepending on the pricing level provided in the Credit Agreement, which in turndepends upon the Combined Total Leverage Ratio (as defined in the creditagreement).  The average interest ratesfor the credit agreement were 4.1% and 3.5% for the three months endedSeptember 30, 2010 and 2009, respectively, and 3.8% and 3.7% for the ninemonths ended September 30, 2010 and 2009, respectively.

 

Weincur a letter of credit fee of 2.50% - 3.00% per annum for each letter ofcredit issued.  In addition, we incur acommitment fee on the unused portion of each facility under the creditagreement equal to 0.50% per annum.

 

Asof September 30, 2010, we had total borrowings outstanding under ourcredit agreement of $765.7 million, including $300.0 millionoutstanding on our revolving credit facility. In addition, we had outstanding letters of credit of $46.5 million.  Subject to borrowing base limitations, thetotal remaining availability for borrowings and letters of credit atSeptember 30, 2010 and December 31, 2009 was $337.8 million and$211.2 million, respectively.

 

Thecredit agreement imposes financial covenants that require us to maintaincertain minimum working capital amounts, capital expenditure limits, a minimumEBITDA, a minimum combined interest coverage ratio, a maximum senior securedleverage ratio and a maximum total leverage ratio.  We were in compliance with the foregoingcovenants at September 30, 2010. The credit agreement also contains a representation whereby there can beno event or circumstance, either individually or in the aggregate, that has hador could reasonably be expected to have a Material Adverse Effect (as definedin the credit agreement).  Under thecredit agreement, the clean down requirement of the previous credit agreementwas eliminated.

 

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Thecredit agreement limits distributions to our unitholders to available cash.

 

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

 

Thelending group under the credit agreement is comprised of the followinginstitutions: Bank of America, N.A.; JPMorgan Chase Bank, N.A.; WellsFargo Bank, N.A.; Societe Generale; Standard Chartered Bank;RBS Citizens, National Association; BNP Paribas; Cooperative CentraleRaiffeisen-Boerenleenbank B.A., “Radobank Nederland” New York Branch;Sovereign Bank (Santander Group); Credit Agricole Corporate and InvestmentBank; Keybank National Association; Toronto Dominion (New York);RB International Finance (USA) LLC (formerly known asRZB Finance LLC); Royal Bank of Canada; Raymond James Bank, FSB;Barclays Bank plc; Webster Bank, National Association; Natixis, New YorkBranch; DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt AmMain; Branch Banking & Trust Company; and Sumitomo Mitsui BankingCorporation.

 

***Off-Balance Sheet Arrangements***

 

Wehave no off-balance sheet arrangements.

 

**CriticalAccounting Policies and Estimates**

 

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

 

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

 

Thesignificant accounting policies and estimates that we have adopted and followedin the preparation of our consolidated financial statements are detailed inNote 2 of Notes to Consolidated Financial Statements, “Summary ofSignificant Accounting Policies” included in our Annual Report on Form 10-Kfor the year ended December 31, 2009. 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.

 

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**Item 3.        Quantitative and Qualitative Disclosures about Market Risk**

 

Marketrisk is the risk of loss arising from adverse changes in market rates andprices.  The principal market risks towhich we are exposed are interest rate risk and commodity risk.  We utilize two interest rate collars and aforward starting swap to manage exposure to interest rate risk and variousderivative instruments to manage exposure to commodity risk.

 

***Interest Rate Risk***

 

Weutilize variable rate debt and are exposed to market risk due to the floatinginterest rates on our credit agreement. Therefore, from time to time, we utilize interest rate collars and swapsto hedge interest obligations on specific and anticipated debt issuances.

 

OnAugust 18, 2010, we amended our credit agreement.  During the period from January 1, 2009through May 13, 2010, borrowings under the working capital revolvingcredit facility bore interest at (1) the Eurodollar rate plus 1.75% to2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) the baserate plus 0.75% to 1.25%, each depending on the pricing level provided in theprevious credit agreement, which in turn depended upon the Combined InterestCoverage Ratio (as defined in the previous credit agreement).  Borrowings under the revolving creditfacility bore interest at (1) the Eurodollar rate plus 2.25% to 2.75%,(2) the cost of funds rate plus 1.75% to 2.25%, or (3) the base rateplus 0.75% to 1.25%, each depending on the pricing level provided in theprevious credit agreement, which in turn depended upon the Combined InterestCoverage Ratio (as defined in the previous credit agreement).

 

CommencingMay 14, 2010, borrowings under the working capital revolving creditfacility bear interest at (1) the Eurodollar rate plus 2.50% to 3.00%,(2) the cost of funds rate plus 2.50% to 3.00%, or (3) the base rateplus 1.50% to 2.00%, each depending on the pricing level provided in the creditagreement, which in turn depends upon the Utilization Amount (as defined in thecredit agreement).

 

Duringthe period from May 14, 2010 through September 7, 2010, borrowingsunder the revolving credit facility bore interest at (1) the Eurodollarrate plus 3.00% to 3.25%, (2) the cost of funds rate plus 3.00% to 3.25%,or (3) the base rate plus 2.00% to 2.25%, each depending on the pricinglevel provided in the credit agreement, which in turn depended upon theCombined Senior Secured Leverage Ratio (as defined in the creditagreement).  Commencing September 8,2010, borrowings under the revolving credit facility bear interest at(1) the Eurodollar rate plus 3.00% to 3.875%, (2) the cost of fundsrate plus 3.00% to 3.875%, or (3) the base rate plus 2.00% to 2.875%, eachdepending on the pricing level provided in the credit agreement, which in turndepends upon the Combined Total Leverage Ratio (as defined in the creditagreement).  The average interest ratesfor the credit agreement were 4.1% and 3.5% for the three months endedSeptember 30, 2010 and 2009, respectively, and 3.8% and 3.7% for the ninemonths ended September 30, 2010 and 2009, respectively.

 

Asof September 30, 2010, we had total borrowings outstanding under thecredit agreement of $765.7 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 $7.7 millionannually, assuming, however, that our indebtedness remained constant throughoutthe year.

 

We executed two zero premiuminterest rate collars with major financial institutions.  Each collar is designated and accounted foras a cash flow hedge.  The first collar,which became effective on May 14,2007 and expires on May 14,2011, is used to hedge the variability in interest payments due to changes inthe three-month LIBOR rate with respect to $100.0 million of three-month LIBOR-based borrowings.  Under the first collar, we capped ourexposure at a maximum three-month LIBOR rate of 5.75% and established a minimumfloor rate of 3.75%.  Whenever thethree-month LIBOR rate is greater than the cap, we receive from the respectivefinancial institution the difference between the cap and the currentthree-month LIBOR rate on the $100.0 million of three-month LIBOR-based borrowings.  Conversely, whenever the three-month LIBORrate is lower than the floor, we remit to the respective financial institutionthe difference between the floor and the current three-month LIBOR rate on the$100.0 millionof three-month LIBOR-based borrowings. As of September 30, 2010, the three-month LIBOR rate of 0.38%was lower than the floor rate.  As aresult, in October 2010, we remitted to the respective financialinstitution the difference between the floor rate and the current rate whichamounted to approximately $431,000.

 

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On September 29, 2008, we executed our second zero premium interest ratecollar.  The second collar, which becameeffective on October 2,2008 and expires on October 2, 2013,is used to hedge the variability in cash flows in monthly interest paymentsmade on our $100.0 millionone-month LIBOR-based borrowings (and subsequent refinancings thereof) due tochanges in the one-month LIBOR rate. Under the second collar, we capped our exposure at a maximum one-monthLIBOR rate of 5.50% 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-month LIBOR-based borrowings.  Conversely, whenever the one-month LIBOR rateis lower than the floor, we remit to the respective financial institution thedifference between the floor and the current one-month LIBOR rate on the $100.0 million of one-month LIBOR-based borrowings.  As of September 30, 2010, the one-month LIBOR rate of 0.26% was lowerthan the floor rate.  As a result, in October 2010,we remitted to the respective financial institution the difference between thefloor rate and the current rate which amounted to approximately $197,000.

 

In addition, in October 2009,we executed a forward starting swap with a major financial institution.  The swap, which will become effective on May 16, 2011 and expire on May 16, 2016, will be used to hedge the variability in interestpayments due to changes in the one-month LIBOR swap curve with respect to$100.0 millionof one-month LIBOR-based borrowings at a fixed rate of 3.93%.  See Note 5 of Notes to Consolidated Financial Statements foradditional information on the interest rate collars and the forward startingswap.

 

***Commodity Risk***

 

Wehedge our exposure to price fluctuations with respect to refined petroleumproducts and blendstocks in storage and expected purchases and sales of thesecommodities.  The derivative instrumentsutilized consist primarily of futures contracts traded on the NYMEX and theChicago Mercantile Exchange and over-the-counter transactions, including swapagreements entered into with established financial institutions and othercredit-approved energy companies.  Ourpolicy is generally to purchase only products for which we have a market and tostructure our sales contracts so that price fluctuations do not materiallyaffect our profit.  While our policiesare designed to minimize market risk, some degree of exposure to unforeseenfluctuations in market conditions remains. Except for the controlled trading program discussed below, we do notacquire and hold futures contracts or other derivative products for the purposeof speculating on price changes that might expose us to indeterminable losses.

 

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

 

Weenter into futures contracts to minimize or hedge the impact of marketfluctuations on our purchases and forward fixed price sales of refinedpetroleum products.  Any hedgeineffectiveness is reflected in our results of operations.  We utilize regulated exchanges, including theNYMEX and the Chicago Mercantile Exchange, which are regulated exchanges forenergy products that it trades, thereby reducing potential delivery and supplyrisks.  Generally, our practice is toclose all exchange positions rather than to make or receive physicaldeliveries.  With respect to other energyproducts, which may not have a correlated exchange contract, we enter intoderivative agreements with counterparties that we believe have a strong creditprofile, in order to hedge market fluctuations and/or lock-in margins relativeto our commitments.

 

AtSeptember 30, 2010, the fair value of all of our commodity risk derivativeinstruments and the change in fair value that would be expected from a 10%price increase or decrease are shown in the table below (in thousands):

 

| ** **                    | ** ** | ** **                                                | ** ** | **Gain (Loss)**                             | ** ** |
|-------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **Fair Value at  September 30, 2010** | ** ** | **Effect of 10%  Price Increase** | ** ** | **Effect of 10%  Price Decrease** | ** ** |
| NYMEX contracts               |       | $                                                         | (16,990    | )                                                | $          | (35,130 | ) | $ | 35,130 |   |
| Swaps, options and other, net |       | (1,620                                                    | )          | (5,592                                           | )          | 2,215 |   |
|                          |       | $                                                         | (18,610    | )                                                | $          | (40,722 | ) | $ | 37,345 |   |

 

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Thefair values of the futures contracts are based on quoted market prices obtainedfrom the NYMEX.  The fair value of theswaps and option contracts are estimated based on quoted prices from varioussources such as independent reporting services, industry publications andbrokers.  These quotes are compared tothe contract price of the swap, which approximates the gain or loss that wouldhave been realized if the contracts had been closed out at September 30,2010.  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 ordecrease in price regardless of term or historical relationships between thecontractual price 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 brokerage margin balance was$10.5 million at September 30, 2010.

 

Weare exposed to credit loss in the event of nonperformance by counterparties offutures contracts, forward contracts and swap agreements.  We anticipate some nonperformance by some ofthese counterparties which, in the aggregate, we do not believe at this timewill have a material adverse effect on our financial condition, results ofoperations or cash available for distribution to our unitholders.  Futures contracts, the primary derivativeinstrument utilized, are traded on regulated exchanges, greatly reducingpotential credit risks.  Exposure on swapand certain option agreements is limited to the amount of the recorded fairvalue as of the balance sheet dates.  Weutilize primarily one clearing broker, a major financial institution, for allNYMEX derivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is displayed on a net basis.

 

**Item 4.        Controls and Procedures**

 

***Disclosure Controls andProcedures***

 

Wemaintain disclosure controls and procedures that are designed to ensure thatthe information required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms 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 September 30,2010.

 

***Internal Control overFinancial Reporting***

 

Therehas not been any change in our internal control over financial reporting thatoccurred during the quarter ended September 30, 2010 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.        Legal Proceedings**

 

***General***

 

Althoughwe may, from time to time, be involved in litigation and claims arising out ofour operations in the normal course of business, we do not believe that we area party to any litigation that will have a material adverse impact on ourfinancial condition or results of operations. Except as described below and in Note 12 in this Quarterly Reporton Form 10-Q, we are not aware of any significant legal or governmentalproceedings against 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.

 

***Other***

 

Certainof our employees at our terminal in Oyster Bay (Commander), New York wereemployed under a collective bargaining agreement that expired in April 2010.  We have negotiated a new collectivebargaining agreement, in principle, with a newly-elected union representingthese employees.  We do not believe theresults of these negotiations will have a material adverse effect on ouroperations.

 

Certainof our employees at our terminals in Albany and Newburgh, New York acquiredfrom ExxonMobil in 2007 are employed under a collective bargaining agreementthat expired in May 2010.  We havenegotiated a new collective bargaining agreement, in principle, with theincumbent union.  We do not believe theresults of these negotiations will have a material adverse effect on ouroperations.

 

**Item 1A.     Risk Factors**

 

Inaddition to other information set forth in this report, you should carefullyconsider the factors discussed below and in Part I, Item 1A, “RiskFactors” in our Annual Report on Form 10-K for the year endedDecember 31, 2009, which could materially affect our business, financialcondition or future results.

 

***Unitholders may have liability to repaydistributions.***

 

Undercertain circumstances, unitholders may have to repay amounts wrongfullyreturned or distributed to them.  UnderDelaware law, the Partnership may not make a distribution to unitholders if thedistribution would cause the Partnership’s liabilities to exceed the fair valueof its assets.  Delaware law providesthat for a period of three years from the date of the impermissibledistribution, limited partners who received the distribution and who knew atthe time of the distribution that it violated Delaware law will be liable tothe limited partnership for the distribution amount.  Purchasers of units who become limitedpartners are liable for the obligations of the transferring limited partner tomake contributions to the Partnership that are known to the purchaser of unitsat the time it became a limited partner and for unknown obligations if theliabilities could be determined from the Partnership’s partnershipagreement.  Liabilities to partners onaccount of their partnership interests and liabilities that are non-recourse tothe Partnership are not counted for purposes of determining whether adistribution is permitted.

 

***The recent adoption of derivatives legislation by the United StatesCongress could have an adverse effect on our ability to use derivativeinstruments to reduce the effect of commodity prices, interest rate and otherrisks associated with our business.***

 

TheUnited States Congress recently adopted comprehensive financial reformlegislation that establishes federal oversight and regulation of theover-the-counter derivatives market and entities, such as the Partnership, thatparticipate in that market.  The newlegislation was signed into law by the President on July 21, 2010 andrequires the Commodities Futures Trading Commission (the “CFTC”) and the SEC topromulgate rules and regulations implementing the new legislation within360 days from the date of enactment.  TheCFTC has also proposed regulations to set position limits for certain futuresand option contracts in the major energy markets, although it is not possibleat

 

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thistime to predict whether or when the CFTC will adopt those rules or includecomparable provisions in its rulemaking under the new legislation.  The financial reform legislation may alsorequire compliance with margin requirements and with certain clearing andtrade-execution requirements in connection with certain derivative activities,although the application of those provisions is uncertain at this time.  The financial reform legislation may alsorequire the counterparties to our derivative instruments to spin off some oftheir derivatives activities to a separate entity, which may not be ascreditworthy as the current counterparty. The new legislation and any new regulations could significantly increasethe cost of some derivative contracts (including through requirements to postcollateral which could adversely affect our available liquidity), materiallyalter the terms of some derivative contracts, reduce the availability of somederivatives to protect against risks we encounter, reduce our ability tomonetize or restructure our existing derivative contracts, and potentiallyincrease our exposure to less creditworthy counterparties.

 

***Erosion of the Mobil brand could have an adverse impact on our sales ofgasoline.***

 

Webelieve that the success of our recent ExxonMobil acquisition will bedependent, in part, upon the continuing favorable reputation of the Mobilbrand.  Erosion of the value of the Mobilbrand could have a negative impact on our gasoline sales, which in turn maycause our recent acquisition to be less profitable.

 

***New technologies and alternative fuel sources could reduce demand forour gasoline products.***

 

Technologicaladvances which rely upon alternative fuel sources, such as electric, hybrid orbattery powered motor vehicles, may adversely affect the demand forgasoline.  We could face additionalcompetition from alternative energy sources as a result of futuregovernment-mandated controls or regulations which promote the use ofalternative fuel sources. A reduction in demand for our gasoline products couldhave an adverse effect on our results of operations and financial condition.

 

***The ethanol industry is highly dependent upon government usage mandatesand tax credits.  Changes to thesemandates and/or tax credits could adversely affect the availability and pricingof ethanol and negatively impact our gasoline sales.***

 

Ourethanol purchasing, transporting, blending and sales activities subject us tovarious risks including operating risks,****risks ofsupply disruption, commodity price fluctuations, and changes in governmentmandates and regulations. The domestic market for ethanol is tied to federalmandates for blending ethanol with gasoline. Future demand will be largely dependent upon the economic incentives toblend based upon the relative value of gasoline and ethanol, taking intoconsideration the Volumetric Ethanol Excise Tax Credit (the “blender’s credit”)and the EPA’s regulations on the Renewable Fuel Standard (“RFS”) program. Anysignificant increase in production capacity beyond the RFS level may have anadverse impact on ethanol prices, and the RFS mandate with respect to ethanolderived from grain could be reduced or waived entirely.  The blender’s credit is currently authorizedthrough December 31, 2010.  Areduction or waiver of the RFS mandate or the failure to extend the blender’scredit could adversely affect the availability and pricing of ethanol and ourfuture sales.

 

***We may not be able to obtain state fund reimbursement of our environmentalremediation costs for gas stations.***

 

Wherereleases of petroleum products have occurred, federal and state laws andregulations require that contamination caused by such releases be assessed andremediated to meet the applicable standards. Our obligation to remediate this type of contamination varies, dependingupon applicable laws and regulations and the extent of, and the facts relatingto, the release.   A portion of theremediation costs may be recoverable from the reimbursement fund of theapplicable state and/or from third party insurance after any deductible hasbeen met, but there are no assurances that such reimbursement funds orinsurance proceeds will be available to us.

 

***We depend upon a small number of suppliers for a substantial portion ofour convenience store merchandise inventory. A disruption in supply or an unexpected change in our relationships withour principal merchandise suppliers could have an adverse effect on ourconvenience store results of operations.***

 

Wepurchase convenience store merchandise inventory from a small number ofsuppliers for the company operated convenience stores.  A change of merchandise suppliers, adisruption in supply or a significant change in our relationships with ourprincipal merchandise suppliers could have an adverse effect on this businessand the results of operations of our company operated convenience stores.

 

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***We are subject to federal and state non-environmental regulations whichcould have an adverse effect on our convenience store business and results ofoperations.***

 

Ourbusiness is subject to extensive governmental laws and regulations that includebut are not limited to legal restrictions on the sale of alcohol, tobacco andlottery products, food safety and health requirements and publicaccessibility.  Furthermore, state andlocal regulatory agencies have the power to approve, revoke, suspend, or denyapplications for and renewals of permits and licenses relating to the sale ofalcohol, tobacco and lottery products or to seek other remedies.  A violation of or change in such laws and/orregulations could have an adverse effect on our convenience store business andresults of operations.

 

***We are subject to federal and state environmental regulations whichcould have a material adverse effect on our retail operations business.***

 

Ourretail operations are subject to extensive federal, state and local laws andregulations, including those relating to the protection of the environment,waste management, discharge of hazardous materials, pollution prevention, aswell as laws and regulations relating to public safety and health. Certain ofthese laws and regulations may require assessment or remediation efforts.  Retail operations with underground storagetanks (“USTs”) are subject to federal and state regulations andlegislation.  Compliance with existingand future environmental laws regulating underground storage tanks may requiresignificant capital expenditures and increased operating and maintenancecosts.  The operation of USTs also posescertain other risks, including damages associated with soil and groundwatercontamination. Leaks from USTs which may occur at one or more of our gasstations may impact soil or groundwater and could result in fines or civilliability for us. We may be required to make material expenditures to modifyoperations, perform site cleanups, or curtail operations.

 

***Future consumer or other litigation could adversely affect ourfinancial condition and results of operations.***

 

Ourretail operations are characterized by a high volume of customer traffic and bytransactions involving an array of products. These operations carry a higher exposure to consumer litigation riskwhen compared to the operations of companies operating in many otherindustries.  Consequently, we may becomea party to individual personal injury, bad fuel, products liability and otherlegal actions in the ordinary course of our retail gasoline and conveniencestore business.  While these actions aregenerally routine in nature, incidental to the operation of business andimmaterial in scope, if our assessment of any action or actions should proveinaccurate, our financial condition and results of operations could beadversely impacted.  Additionally, we areoccasionally exposed to industry-wide or class action claims arising from theproducts we carry or industry-specific business practices.  Our defense costs and any resulting damageawards or settlement amounts may not be fully covered by our insurancepolicies.  An unfavorable outcome orsettlement of one or more of these lawsuits could have a material adverseeffect on our financial position, liquidity and results of operations in aparticular period or periods.

 

***We rely on our information technology systems to manage numerousaspects of our business, and a disruption of these systems could adverselyaffect our business.***

 

Wedepend on our information technology (“IT”) systems to manage numerous aspectsof our business and to provide analytical information to management.  Our IT systems are an essential component ofour business and growth strategies, and a serious disruption to our IT systemscould significantly limit our ability to manage and operate our businessefficiently.  These systems are vulnerableto, among other things, damage and interruption from power loss or naturaldisasters, computer system and network failures, loss of telecommunicationservices, physical and electronic loss of data, security breaches and computerviruses.  We have a disaster recoveryplan in place, but this plan may not entirely prevent delays or othercomplications that could arise from an IT systems failure. Any failure orinterruption in our IT systems could have a negative impact on our operatingresults, cause our business and competitive position to suffer, and damage ourreputation.

 

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| **Item 6.** | **Exhibits** |
|-------------|--------------|
|        |         |   |   |   |
| 3.1         |         | — |   | Third Amended and Restated  Agreement of Limited Partnership of Global Partners LP dated as of December 9,  2009 (incorporated herein by reference to Exhibit 3.1 to the Current  Report on Form 8-K filed on December 15, 2009). |
|        |         |   |   |   |
| 10.1        |         | — |   | First Amendment to Amended  and Restated Credit Agreement, dated as of August 18, 2010, by and among  Global Operating LLC, Global Companies LLC, Global Montello Group  Corp., Glen Hes Corp., Chelsea Sandwich LLC, GLP Finance Corp. and  Global Energy Marketing LLC as borrowers, Global Partners LP and  Global GP LLC, as guarantors, each lender from time to time party thereto,  Bank of America, N.A., as Administrative Agent and L/C Issuer,  JPMorgan Chase Bank, N.A. as Syndication Agent, Societe Generale, Standard  Chartered Bank, Wells Fargo Bank, N.A. and RBS Citizens, National Association  as Co-Documentation Agents (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  August 24, 2010). |
|        |         |   |   |   |
| 10.2        |         | — |   | First Amendment to Sale  and Purchase Agreement, effective August 12, 2010 among ExxonMobil Oil  Corporation and Exxon Mobil Corporation, as sellers, and Global  Companies LLC (incorporated herein by reference to Exhibit 10.1 to  the Current Report on Form 8-K filed on August 31, 2010). |
|        |         |   |   |   |
| 10.3        |         | — |   | Second Amendment to Sale  and Purchase Agreement, dated September 7, 2010, among ExxonMobil Oil  Corporation and Exxon Mobil Corporation, as sellers, and Global  Companies LLC, as buyer (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  September 9, 2010). |
|        |         |   |   |   |
| 10.4        |         | — |   | Facilities Management  Agreement, dated September 8, 2010, between Global Montello Group Corp.  and Alliance Energy LLC (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  September 14, 2010). |
|        |         |   |   |   |
| 10.5        |         | — |   | Facilities Management  Agreement, dated September 8, 2010, between Global Companies LLC  and Alliance Energy LLC (incorporated herein by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed on  September 14, 2010). |
|        |         |   |   |   |
| 10.6*       |         | — |   | Brand Fee Agreement, dated  September 3, 2010, between ExxonMobil Oil Corporation and Global  Companies LLC. |
|        |         |   |   |   |
| 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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| *          | Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be  furnished supplementally to the SEC upon request.             |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                         |
| **†** | Not  deemed “filed” for purposes of Section 18 of the Securities Exchange Act  of 1934 or otherwise subject to the liability of that section. |

 

60

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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:  November 5, 2010 |                   | By: | /s/  Eric Slifka |   |
|                               |                   |   | Eric  Slifka |
|                               |                   |   | President  and Chief Executive Officer |
|                               |                   |   | (Principal  Executive Officer) |
|                               |                   |   |
|                               |                   |   |
| Dated:  November 5, 2010 |                   | By: | /s/  Thomas J. Hollister |   |
|                               |                   |   | Thomas  J. Hollister |
|                               |                   |   | Chief  Operating Officer and Chief Financial Officer |
|                               |                   |   | (Principal  Financial Officer) |

 

61

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description** |
|---------------------|------------|------------|------------|-----------------|
|                |       |       |       |            |   |
| 3.1                 |       |       | —     |            | Third Amended and Restated  Agreement of Limited Partnership of Global Partners LP dated as of  December 9, 2009 (incorporated herein by reference to Exhibit 3.1  to the Current Report on Form 8-K filed on December 15, 2009). |
|                |       |       |       |            |   |
| 10.1                |       |       | —     |            | First Amendment to Amended  and Restated Credit Agreement, dated as of August 18, 2010, by and among  Global Operating LLC, Global Companies LLC, Global Montello Group Corp.,  Glen Hes Corp., Chelsea Sandwich LLC, GLP Finance Corp. and Global  Energy Marketing LLC as borrowers, Global Partners LP and Global  GP LLC, as guarantors, each lender from time to time party thereto, Bank  of America, N.A., as Administrative Agent and L/C Issuer, JPMorgan  Chase Bank, N.A. as Syndication Agent, Societe Generale, Standard Chartered  Bank, Wells Fargo Bank, N.A. and RBS Citizens, National Association as  Co-Documentation Agents (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  August 24, 2010). |
|                |       |       |       |            |   |
| 10.2                |       |       | —     |            | First Amendment to Sale  and Purchase Agreement, effective August 12, 2010 among ExxonMobil Oil  Corporation and Exxon Mobil Corporation, as sellers, and Global  Companies LLC (incorporated herein by reference to Exhibit 10.1 to  the Current Report on Form 8-K filed on August 31, 2010). |
|                |       |       |       |            |   |
| 10.3                |       |       | —     |            | Second Amendment to Sale  and Purchase Agreement, dated September 7, 2010, among ExxonMobil Oil  Corporation and Exxon Mobil Corporation, as sellers, and Global  Companies LLC, as buyer (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  September 9, 2010). |
|                |       |       |       |            |   |
| 10.4                |       |       | —     |            | Facilities Management  Agreement, dated September 8, 2010, between Global Montello Group Corp.  and Alliance Energy LLC (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed on  September 14, 2010). |
|                |       |       |       |            |   |
| 10.5                |       |       | —     |            | Facilities Management  Agreement, dated September 8, 2010, between Global Companies LLC  and Alliance Energy LLC (incorporated herein by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed on  September 14, 2010). |
|                |       |       |       |            |   |
| 10.6*               |       |       | —     |            | Brand Fee Agreement, dated  September 3, 2010, between ExxonMobil Oil Corporation and Global  Companies LLC. |
|                |       |       |       |            |   |
| 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. |

 

----

 

*                    Exhibitshave been omitted pursuant to Item 601(b)(2) of Regulation S-K and will befurnished supplementally to the SEC upon request.

 

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

 

62

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