**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

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

 

| **Delaware**                                                    | ** ** | **74-3140887**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation

or organization) |       | (I.R.S. Employer Identification No.) |

 

**P.O. Box9161**

**800 SouthStreet**

**Waltham,Massachusetts 02454-9161**

(Addressof principal executive offices, including zip code)

 

**(781)894-8800**

(Registrant’stelephone number, including area code)

 
| Indicate by check mark whether the  registrant (1) has filed all reports required to be filed by  Section 13 or 15(d) of the Securities Exchange Act of 1934 during the  preceding 12 months (or for such shorter period that the registrant was  required to file such reports),                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| and  (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                                                                                                                     | Yes x  No o |
|                                                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark whether the  registrant has submitted electronically and posted on its corporate Web site,  if any, every Interactive Data File required to be submitted and posted  pursuant to Rule 405 of Regulation S-T during the preceding  12 months (or                                                |
| for such  shorter period that the registrant was required to submit and post such  files.                                                                                                                                                                                                                                            | Yes o  No o |
|                                                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark whether the registrant is a large accelerated  filer, an accelerated filer, a non-accelerated filer, or a smaller reporting  company. See the definitions of “large accelerated filer,” “accelerated  filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |

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

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

 

The issuer had 11,338,139 common units and5,642,424 subordinated units outstanding as of May 3, 2010.

 

 

 

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**TABLE OFCONTENTS**

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

 

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**Item 1.    Financial Statements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                      | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2010**           | ** **    | **2009**              | ** ** |
| **Assets**                                                                                                                                                                      | ** ** | ** **         | ** **    | ** **            | ** ** |
| Current assets:                                                                                                                                                                 |       |               |          |                  |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                  |  750     |                  | $          |  662 |   |
| Accounts receivable, net                                                                                                                                                        |       | 268,347            |          | 335,912               |       |
| Accounts receivable—affiliates                                                                                                                                             |       | 4,222              |          | 1,565                 |       |
| Inventories                                                                                                                                                                     |       | 443,259            |          | 465,923               |       |
| Brokerage margin deposits                                                                                                                                                       |       | 10,301             |          | 18,059                |       |
| Fair value of forward fixed price contracts                                                                                                                                     |       | 12,730             |          | 3,089                 |       |
| Prepaid expenses and other current assets                                                                                                                                       |       | 35,193             |          | 37,648                |       |
| Total current assets                                                                                                                                                            |       | 774,802            |          | 862,858               |       |
|                                                                                                                                                                            |       |               |          |                  |       |
| Property and equipment, net                                                                                                                                                     |       | 158,236            |          | 159,292               |       |
| Intangible assets, net                                                                                                                                                          |       | 27,866             |          | 28,557                |       |
| Other assets                                                                                                                                                                    |       | 1,431              |          | 1,996                 |       |
| Total assets                                                                                                                                                                    |       | $                  |  962,335 |                  | $          |  1,052,703 |   |
| ** **                                                                                                                                                                      | ** ** | ** **         | ** **    | ** **            | ** ** |
| **Liabilities and partners’  equity**                                                                                                                                      | ** ** | ** **         | ** **    | ** **            | ** ** |
| Current liabilities:                                                                                                                                                            |       |               |          |                  |       |
| Accounts payable                                                                                                                                                                |       | $                  |  187,648 |                  | $          |  243,449 |   |
| Working capital revolving credit facility—current  portion                                                                                                                 |       | 109,788            |          | 221,711               |       |
| Environmental liabilities—current portion                                                                                                                                  |       | 3,296              |          | 3,296                 |       |
| Accrued expenses and other current liabilities                                                                                                                                  |       | 73,802             |          | 77,604                |       |
| Income taxes payable                                                                                                                                                            |       | 128                |          | 461                   |       |
| Obligations on forward fixed price contracts and  other derivatives                                                                                                             |       | 19,380             |          | 21,114                |       |
| Total current liabilities                                                                                                                                                       |       | 394,042            |          | 567,635               |       |
|                                                                                                                                                                            |       |               |          |                  |       |
| Working capital revolving credit facility—less  current portion                                                                                                            |       | 231,412            |          | 240,889               |       |
| Acquisition facility                                                                                                                                                            |       | 71,200             |          | 71,200                |       |
| Environmental liabilities—less current portion                                                                                                                             |       | 2,200              |          | 2,254                 |       |
| Accrued pension benefit cost                                                                                                                                                    |       | 2,395              |          | 2,751                 |       |
| Deferred compensation                                                                                                                                                           |       | 1,946              |          | 1,840                 |       |
| Other long-term liabilities                                                                                                                                                     |       | 10,767             |          | 8,714                 |       |
| Total liabilities                                                                                                                                                               |       | 713,962            |          | 895,283               |       |
|                                                                                                                                                                            |       |               |          |                  |       |
| **Partners’ equity**                                                                                                                                                       | ** ** | ** **         | ** **    | ** **            | ** ** |
| Common unitholders (11,338,139 units issued and  11,274,695 outstanding at March 31, 2010 and 7,428,139 units issued and  7,380,996 outstanding at December 31, 2009) |       | 254,692       |          | 165,129               |       |
| Subordinated unitholders (5,642,424 units issued  and outstanding at March 31, 2010 and December 31, 2009)                                                            |       | 2,651         |          | (713                  | )          |
| General partner interest (230,303 equivalent units  outstanding at March 31, 2010 and December 31, 2009)                                                              |       | 108                |          | (29                   | )          |
| Accumulated other comprehensive loss                                                                                                                                            |       | (9,078             | )             | (6,967                | )          |
| Total partners’ equity                                                                                                                                                     |       | 248,373            |          | 157,420               |       |
| Total liabilities and partners’ equity                                                                                                                                     |       | $                  |  962,335 |                  | $          |  1,052,703 |   |

 

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

 

 

1

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**GLOBAL PARTNERS LP**

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

**(Unaudited)**

 

 
| ** **                                                  | ** **                                                                               | **Three  Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------------------------------------------------------------------------------------|-----------------------------------------|------------|
| ** **                                                  | ** **                                                                               | **2010**                                | ** ** | **2009** | ** ** |
| ** **                                                  | ** **                                                                               | ** **                              | ** ** | ** ** | ** ** |
| Sales                                                       |                                                                                     | $                                       | 1,962,384  |   | $ | 1,632,955 |   |
| Cost of sales                                               |                                                                                     | 1,916,977                               |       | 1,582,241 |   |
| Gross profit                                                |                                                                                     | 45,407                                  |       | 50,714 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Costs and operating expenses:                               |                                                                                     |                                    |       |   |   |
| Selling, general and administrative expenses                |                                                                                     | 16,578                                  |       | 18,075 |   |
| Operating expenses                                          |                                                                                     | 8,659                                   |       | 8,475 |   |
| Amortization expenses                                       |                                                                                     | 691                                     |       | 800 |   |
| Total costs and operating expenses                          |                                                                                     | 25,928                                  |       | 27,350 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Operating income                                            |                                                                                     | 19,479                                  |       | 23,364 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Interest expense                                            |                                                                                     | (4,064                                  | )          | (3,776 | ) |
|                                                        |                                                                                     |                                    |       |   |   |
| Income before income tax  expense                           |                                                                                     | 15,415                                  |       | 19,588 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Income tax expense                                          |                                                                                     | (387                                    | )          | (725 | ) |
|                                                        |                                                                                     |                                    |       |   |   |
| Net income                                                  |                                                                                     | 15,028                                  |       | 18,863 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Less:                                                       | General  partner’s interest in net income,  including incentive distribution rights |                                    | (299       | ) | (376 | ) |
|                                                        |                                                                                     |                                    |       |   |   |
| Limited partners’ interest in net income               |                                                                                     | $                                       | 14,729     |   | $ | 18,487 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Basic net income per limited partner unit                   |                                                                                     | $                                       | 1.08       |   | $ | 1.41 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Diluted net income per limited partner unit                 |                                                                                     | $                                       | 1.06       |   | $ | 1.40 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Basic weighted average limited partner units  outstanding   |                                                                                     | 13,585                                  |       | 13,071 |   |
|                                                        |                                                                                     |                                    |       |   |   |
| Diluted weighted average limited partner units  outstanding |                                                                                     | 13,838                                  |       | 13,203 |   |
|                                                             |                                                                                          |                                         |            |  |  |  |  |  |

 

 

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

 

 

2

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**GLOBAL PARTNERS LP**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                          |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 15,028     |   | $ | 18,863 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                    |       |   |   |
| Depreciation and amortization                                                      |       | 3,662                                   |       | 3,713 |   |
| Amortization of deferred financing fees                                            |       | 387                                     |       | 289 |   |
| Gain on disposition of property and equipment and  other                           |       | (1                                      | )          | — |   |
| Bad debt expense                                                                   |       | 190                                     |       | 640 |   |
| Stock-based compensation expense                                                   |       | 128                                     |       | 530 |   |
| Changes in operating assets and liabilities:                                       |       |                                    |       |   |   |
| Accounts receivable                                                                |       | 67,375                                  |       | 20,445 |   |
| Accounts receivable – affiliate                                               |       | (2,657                                  | )          | 1,422 |   |
| Inventories                                                                        |       | 22,664                                  |       | 12,494 |   |
| Broker margin deposits                                                             |       | 7,758                                   |       | (4,187 | ) |
| Prepaid expenses, all other current assets and  other assets                       |       | 2,554                                   |       | (1,966 | ) |
| Accounts payable                                                                   |       | (55,801                                 | )          | (60,179 | ) |
| Income taxes payable                                                               |       | (334                                    | )          | 71 |   |
| Change  in fair value of forward fixed price contracts                             |       | (11,375                                 | )          | 108,719 |   |
| Accrued expenses, all other current liabilities  and other long-term liabilities   |       | (4,084                                  | )          | 10,376 |   |
| Net cash provided by operating activities                                          |       | 45,494                                  |       | 111,230 |   |
|                                                                               |       |                                    |       |   |   |
| **Cash flows from investing  activities**                                          |       |                                    |       |   |   |
| Capital expenditures                                                               |       | (1,930                                  | )          | (2,452 | ) |
| Proceeds from sale of property and equipment                                       |       | 16                                      |       | — |   |
| Net cash used in investing activities                                              |       | (1,914                                  | )          | (2,452 | ) |
|                                                                               |       |                                    |       |   |   |
| **Cash flows from financing  activities**                                          |       |                                    |       |   |   |
| Proceeds from public offering, net                                                 |       | 84,792                                  |       | — |   |
| Payments on credit facilities, net                                                 |       | (121,400                                | )          | (100,200 | ) |
| Repurchased units withheld for tax obligations                                     |       | (404                                    | )          | — |   |
| Distributions to partners                                                          |       | (6,480                                  | )          | (6,534 | ) |
| Net cash used in financing activities                                              |       | (43,492                                 | )          | (106,734 | ) |
|                                                                               |       |                                    |       |   |   |
| Increase in cash and cash equivalents                                              |       | 88                                      |       | 2,044 |   |
| Cash and cash equivalents at beginning of period                                   |       | 662                                     |       | 945 |   |
| Cash and cash equivalents at end of period                                         |       | $                                       | 750        |   | $ | 2,989 |   |
|                                                                               |       |                                    |       |   |   |
| **Supplemental information**                                                       |       |                                    |       |   |   |
| Cash paid during the period for interest                                           |       | $                                       | 4,071      |   | $ | 3,903 |   |

 

 

*The accompanying notes are anintegral part of these*consolidated financialstatements.

 

 

3

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY**

**(In thousands)**

**(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                                       |       | 84,792          |       | —           |       | —       |       | —            |       | 84,792             |       |
| Stock-based compensation                                                 |       | 128             |       | —           |       | —       |       | —            |       | 128                |       |
| Distributions to partners                                                |       | (3,621          | )          | (2,751           | )          | (162         | )          | —            |       | (6,534             | )          |
| Phantom unit dividends                                                   |       | 54              |       | —           |       | —       |       | —            |       | 54                 |       |
| Repurchased units withheld for tax obligations                           |       | (404            | )          | —           |       | —       |       | —            |       | (404               | )          |
| Comprehensive income:                                                    |       |            |       |             |       |         |       |              |       |               |       |
| Net income                                                               |       | 8,614           |       | 6,115            |       | 299          |       | —            |       | 15,028             |       |
| Other comprehensive income:                                              |       |            |       |             |       |         |       |              |       |               |       |
| Change in fair value of interest rate collars and  forward starting swap |       | —          |       | —           |       | —       |       | (2,232            | )          | (2,232             | )          |
| Change in pension liability                                              |       | —          |       | —           |       | —       |       | 121               |       |               | 121        |   |
| Total comprehensive income                                               |       | —          |       | —           |       | —       |       | —            |       | 12,917             |       |
| **Balance at March 31, 2010**                                       |       | $               | 254,692    |             | $          | 2,651        |       | $                 | 108        |               | $          | (9,078 | ) | $ | 248,373 |   |
|                                                                          |            |                 |            |                  |            |              |            |                   |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

*The accompanying notes are anintegral part of these*consolidated financialstatements.

 

 

4

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**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 1.**                      Organizationand Basis of Presentation

 

**Organization**

 

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

 

ThePartnership has five operating subsidiaries: Global Companies** **LLC, itssubsidiary, Glen Hes Corp., Global Montello Group Corp., Chelsea Sandwich** **LLC and Global Energy Marketing** **LLC(“Global Energy”) (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.

 

OnMarch 19, 2010, the Partnership completed a public offering of 3,910,000common units at a price of $22.75 per common unit, which included a 510,000common unit purchase option exercised by the underwriters.  Net proceeds were approximately $84.8 million, after deducting approximately $4.2 million in underwriting fees and offering expenses.  The Partnership used the net proceeds toreduce indebtedness under its senior secured credit agreement.  See Note 14 for additional information related to the publicoffering.

 

ThePartnership’s 1.34% general partner interest (reduced from 1.73% following thePartnership’s public offering discussed above and in Note 14) 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.  Affiliates of the GeneralPartner, including its directors and executive officers, own 241,141 commonunits and 5,642,424 subordinated units, representing a combined 34.2% limitedpartner interest.

 

**Basis of Presentation**

** **

***Interim Financial Statements***

** **

**The accompanying consolidatedfinancial statements as of March 31,2010 and December 31, 2009 and for the three months ended March 31,2010 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 the preparing the accompanyingconsolidated financial statements.

 

The results of operations for the three months ended March 31,2010 are not necessarily indicative of the results of operations that will berealized for the entire year ending December 31, 2010.

 

 

5

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**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

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

 

The following tablepresents the Partnership’s products as a percentage of total sales for theperiods presented:

 
|                                                     | ** ** | **Three  Months Ended  March 31,** |       |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
|                                                     | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Distillate sales: home heating oil, diesel and  kerosene |       | 50%                                     |       | 63% |   |
| Gasoline sales                                           |       | 45%                                     |       | 31% |   |
| Residual oil sales                                       |       | 5%                                      |       | 6% |   |
|                                                     |       | 100%                                    |       | 100% |   |

 

ThePartnership had one customer, ExxonMobil Oil Corporation (“ExxonMobil”), whoaccounted for approximately 17% and 15% of total sales for the three monthsended March 31, 2010 and 2009, respectively.

 

The consolidated 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-Kfor the year ended December 31, 2009.

 

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

 

Under the Partnership’spartnership agreement, for any quarterly period, the incentive distributionrights (“IDRs”) participate in net income only to the extent of the amount ofcash distributions actually declared, thereby excluding the IDRs fromparticipating in the Partnership’s undistributed net income or losses.  Accordingly, the Partnership’s undistributednet income is assumed to be allocated to the common and subordinatedunitholders, or limited partners’ interest, and to the General Partner’sinterest.

 

OnJanuary 20, 2010, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit for the period from October 1,2009 through December 31, 2009. This declared cash distribution resulted in an incentive distribution tothe General Partner, as the holder of the IDRs and enabled the Partnership toreach its second target distribution with respect to such IDRs.  See Note 9, “Cash Distributions” forfurther information.

 

 

6

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**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

The following tableprovides a reconciliation of net income and the assumed allocation of netincome to the limited partners’ interest for purposes of computing net income perlimited partner unit for the three months ended March 31, 2010 and 2009(in thousands, except per unit data):

 
| ** **                                                     | ** ** | **Three  months ended March 31, 2010** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                  | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                                  | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                                 | ** ** | **Total**                                   | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income(1)                                                  |       | $                                           | 15,028     |   | $ | 14,729 |   | $ | 299 |   | $ | — |   |
|                                                           |       |                                        |       |   |   |   |   |   |   |
| Declared distribution                                          |       | $                                           | 8,455      |   | $ | 8,278 |   | $ | 112 |   | $ | 65 |   |
| Assumed allocation of undistributed net income                 |       | 6,573                                       |       | 6,451 |   | 122 |   | — |   |
| Assumed allocation of net income                               |       | $                                           | 15,028     |   | $ | 14,729 |   | $ | 234 |   | $ | 65 |   |
|                                                           |       |                                        |       |   |   |   |   |   |   |
| **Denominator:**                                               |       |                                        |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding(2)   |       |                                        |       | 13,585 |   |   |   |   |   |
| Dilutive effect of phantom units                               |       |                                        |       | 253 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding(2) |       |                                        |       | 13,838 |   |   |   |   |   |
|                                                           |       |                                        |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                      |       |                                        |       | $ | 1.08 |   |   |   |   |   |
| Diluted net income per limited partner unit                    |       |                                        |       | $ | 1.06 |   |   |   |   |   |

 

 

| ** **                                                  | ** ** | **Three  months ended March 31, 2009** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                  | ** ** | **Limited** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **                                  | ** ** | **Partner** | ** ** | **Partner** | ** ** | ** ** | ** ** |
| **Numerator:**                                              | ** ** | **Total**                                   | ** ** | **Interest** | ** ** | **Interest** | ** ** | **IDRs** | ** ** |
| Net income(1)                                               |       | $                                           | 18,863     |   | $ | 18,487 |   | $ | 376 |   | $ | — |   |
|                                                        |       |                                        |       |   |   |   |   |   |   |
| Declared distribution                                       |       | $                                           | 6,534      |   | $ | 6,372 |   | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income              |       | 12,329                                      |       | 12,115 |   | 214 |   | — |   |
| Assumed allocation of net income                            |       | $                                           | 18,863     |   | $ | 18,487 |   | $ | 326 |   | $ | 50 |   |
|                                                        |       |                                        |       |   |   |   |   |   |   |
| **Denominator:**                                            |       |                                        |       |   |   |   |   |   |   |
| Basic weighted average limited partner units  outstanding   |       |                                        |       | 13,071 |   |   |   |   |   |
| Dilutive effect of phantom units                            |       |                                        |       | 132 |   |   |   |   |   |
| Diluted weighted average limited partner units  outstanding |       |                                        |       | 13,203 |   |   |   |   |   |
|                                                        |       |                                        |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                   |       |                                        |       | $ | 1.41 |   |   |   |   |   |
|                                                        |       |                                        |       |   |   |   |   |   |   |
| Diluted net income per limited partner unit                 |       |                                        |       | $ | 1.40 |   |   |   |   |   |

 

----

(1)    On March 19, 2010, the general partner interestwas reduced to 1.34% as a result of the public offering (seeNote 14).  This calculation includesthe effect of the public offering and is based on a weighted average of 1.66%for the three months ended March 31, 2010. For the three months ended March 31, 2009, the general partnerinterest was 1.73%.

(2)    At March 31, 2010, limited partner unitsoutstanding excluded common units held on behalf of the Partnership pursuant toits Repurchase Program and for future satisfaction of the General Partner’sObligations (as defined in Note 12).  These units are not deemed outstandingfor purposes of calculating net income per limited partner unit (basic anddiluted).

 

 

7

----

 

**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 3.**                      ComprehensiveIncome

 

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

 
|                                                                     | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
|                                                                     | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Net income                                                               |       | $                                       | 15,028     |   | $ | 18,863 |   |
| Change in fair value of interest rate collars and  forward starting swap |       | (2,232                                  | )          | 1,152 |   |
| Change in pension liability                                              |       | 121                                     |       | (242 | ) |
| Total comprehensive income                                               |       | $                                       | 12,917     |   | $ | 19,773 |   |

 

**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):

 
| ** **                                         | ** ** | **March 31,  2010** | ** ** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|------------|-----------------------------|------------|
| Distillates: home heating oil, diesel and kerosene |       | $                        | 292,379    |       |                        | $          | 339,737 |   |
| Residual oil                                       |       | 43,756                   |       |       | 39,787                      |       |
| Gasoline                                           |       | 65,323                   |       |       | 64,645                      |       |
| Blend stock                                        |       | 41,801                   |       |       | 21,754                      |       |
| Total                                              |       | $                        | 443,259    |       |                        | $          | 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 $25.1 million and$22.9 million at March 31, 2010 and December 31, 2009,respectively.  Negative exchange balancesare accounted for as accounts payable and amounted to $20.4 million and$10.2 million at March 31, 2010 and December 31, 2009,respectively.  Exchange transactions arevalued using current quoted market prices.

 

**Note 5.**                      DerivativeFinancial Instruments

 

**Accounting and reporting guidancefor derivative instruments and hedging activities requires that an entityrecognize derivatives as either assets or liabilities on the balance sheet andmeasure the instruments at fair value. Changes in the fair value of the derivative are to be recognizedcurrently in earnings, unless specific hedge accounting criteria are met.**

 

 

8

----

 

**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

**The following table presents thevolume of activity related to the Partnership’s derivative financialinstruments at March 31, 2010:**

 
| ** **            | ** ** | **Units(1)** | ** ** | **Unit of Measure**     | ** **          |
|-----------------------|------------|--------------|------------|-------------------------|---------------------|
| Oil Contracts         |       |         |       |                    |                |
| Long                  |       | 7,495        |       | Thousands of barrels    |                |
| Short                 |       | (11,934      | )          | Thousands of barrels    |                |
|                  |       |         |       |                    |                |
| Natural Gas Contracts |       |         |       |                    |                |
| Long                  |       | 14,585       |       | Thousands of decatherms |                |
| Short                 |       | (14,585      | )          | Thousands of decatherms |                |
|                  |       |         |       |                    |                |
| Interest Rate Collars |       | $            | 200        |                    | Millions of dollars |   |
|                  |       |         |       |                    |                |
| Forward Starting Swap |       | $            | 100        |                    | Millions of dollars |   |

 

**(1)**    Number ofopen positions and gross notional amounts do not quantify risk or representassets or liabilities of the Partnership, but are used in the calculation ofcash settlements under the contracts.

 

***Fair Value Hedges***

 

**The fair value of the Partnership’sderivatives is determined through the use of independent markets and is basedupon the prevailing market prices of such instruments at the date ofvaluation.  The Partnership enters intofutures contracts for the receipt or delivery of refined petroleum products infuture periods.  The contracts areentered into in the normal course of business to reduce risk of loss ofinventory on hand, which could result through fluctuations in marketprices.  Changes in the fair value ofthese contracts, as well as the offsetting gain or loss on the hedged inventoryitem, are recognized in earnings as an increase or decrease in cost ofsales.  Ineffectiveness related to thesehedging activities was immaterial for the three months ended March 31,2010 and 2009.**

 

The Partnership also uses futures contracts and swapagreements 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 months ended March 31, 2010 and 2009.

 

 

9

----

 

**GLOBAL PARTNERS LP**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

Thefollowing table presents the gross fair values of the Partnership’s derivativeinstruments and firm commitments and their location in the Partnership’sconsolidated balance sheets at March 31, 2010 and December 31, 2009(in thousands):

 
| ** **                                                            | ** ** | ** **          | ** ** | **March 31,** | ** ** | **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)                 |       | $                  | 3,360      |                  | $          | 4,085 |   |
|                                                                  |       |                |       |               |       |                  |       |
| *Derivatives not designated as  hedging instruments*                  |       |                |       |               |       |                  |       |
| Oil product and natural gas contracts                                 |       | (2)                 |       | 15,006             |       | 11,067                |       |
|                                                                  |       |                |       |               |       |                  |       |
| Total asset derivatives                                               |       |                |       | $                  | 18,366     |                  | $          | 15,152 |   |
|                                                                  |       |                |       |               |       |                  |       |
| **Liability Derivatives**                                             | ** ** | ** **          | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                  |       |                |       |               |       |                  |       |
| *Derivatives  designated as hedging instruments and firm commitments* |       |                |       |               |       |                  |       |
| Oil product contracts(1)                                              |       | (3)                 |       | $                  | 9,959      |                  | $          | 23,030 |   |
|                                                                  |       |                |       |               |       |                  |       |
| *Derivatives not designated as  hedging instruments*                  |       |                |       |               |       |                  |       |
| Oil product and natural gas contracts                                 |       | (4)                 |       | 14,277             |       | 10,805                |       |
|                                                                  |       |                |       |               |       |                  |       |
| Total liability derivatives                                           |       |                |       | $                  | 24,236     |                  | $          | 33,835 |   |

 

(1)  Includes forward fixed price purchase and salecontracts as recognized in the Partnership’s consolidated balance sheets at March 31,2010 and December 31, 2009.

(2)  Fair value of forward fixed price contracts, prepaidexpenses and other current assets and accrued and other current liabilities

(3)  Obligations on forward fixed price contracts and otherderivatives and accrued expenses and other current liabilities

(4)  Accrued expenses and other current liabilities

 

 

10

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

The following table presents the amount of gains andlosses from derivatives involved in fair value hedging relationships recognizedin the Partnership’s consolidated statements of income for the three monthsended March 31, 2010 and 2009 (in thousands):

 
| ** **                                   | ** ** | ** **                                 | ** ** | **Amount of Gain (Loss)**   | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                 | ** ** | **Recognized in Income on** | ** ** |
| ** **                                   | ** ** | ** **                                 | ** ** | **Derivatives**                            | ** ** |
| ** **                                   | ** ** | **Location of Gain (Loss)** | ** ** | **Three Months Ended**           | ** ** |
| **Derivatives in Fair Value** | ** ** | **Recognized in**                     | ** ** | **March 31,**                         | ** ** |
| **Hedging Relationship**                | ** ** | **Income on Derivative**         | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
|                                         |       |                                       |       |                                       |       |   |   |
| Oil  product contracts                       |       | Cost  of sales                             |       | $                                          | (27        | ) | $ | (100,224 | ) |
|                                              |            |                                            |            |                                            |            |  |  |  |  |

 
| ** **                                         |   | ** **                                 |   | **Amount of Gain (Loss)**   |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| ** **                                         |   | ** **                                 |   | **Recognized in Income on** |   |
| ** **                                         |   | ** **                                 |   | **Hedged Items**                      |   |
| ** **                                         |   | **Location of Gain (Loss)** |   | **Three Months Ended**           |   |
| **Hedged Items in Fair Value** |   | **Recognized in Income**         |   | **March 31,**                         |   |
| **Hedge Relationships**                       |   | **on Related Hedged Item**  |   | **2010**                                   |   | **2009** |   |
|                                               |   |                                       |   |                                       |   |   |   |
| Oil product contracts                              |   | Cost of sales                              |   | $                                          | 27     |   | $ | 100,580 |   |
|                                                    |        |                                            |        |                                            |        |  |  |  |  |

 

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

 

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):

 
| ** **           | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------|------------|--------------------------|------------|-----------------------------|------------|
| Futures contracts    |       | $                        | (5,381     | )                           | $          | (14,605 | ) |
| Swaps and other, net |       | (1,269                   | )          | (3,420                      | )          |
| Total                |       | $                        | (6,650     | )                           | $          | (18,025 | ) |

 

The total balances of$(6.6) million and $(18.0) million reflect the fair value of theforward fixed price contract liability net of the corresponding asset on theaccompanying consolidated balance sheets at March 31, 2010 and December 31,2009, respectively.

 

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

 

ThePartnership formally documents all relationships between hedging instrumentsand hedged items after its risk management objectives and strategy forundertaking the hedge are determined. The Partnership calculates hedge effectiveness on a quarterly basis.  This process includes specific identificationof the hedging instrument and the hedged transaction, the nature of the riskbeing hedged and how the hedging instrument’s effectiveness will beassessed.  Both at the inception of thehedge and on an ongoing basis, the Partnership assesses whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair value of hedged items. The derivative instruments that qualify for hedge accounting are fairvalue hedges.

 

 

11

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 5.**                      DerivativeFinancial 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 $10.3 million and$18.1 million at March 31, 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 on the consolidated balancesheets.  Exposure on forward purchase andsale commitments, swap and certain option agreements is limited to the amountof the recorded fair value as of the balance sheet dates.

 

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 hedgesare effective, the changes in the fair value of the derivative instrument isreported as a component of other comprehensive income and reclassified intointerest expense in the same period during which the hedged transaction affectsearnings.

 

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 in thethree-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 March 31, 2010, the three-month LIBOR rate of 0.25%was lower than the floor rate.  As aresult, in April 2010, the Partnership remitted to the respectivefinancial institution the difference between the floor rate and the currentrate which amounted to approximately $428,000 and, at March 31,2010, such amount was recorded in accrued expenses and other currentliabilities in the accompanying consolidated balance sheets.  Thefair values of the first collar, excluding accrued interest, were liabilitiesof approximately $3.5 millionand $3.9 millionas of March 31, 2010 and December 31, 2009, respectively, and wererecorded in both other long-term liabilities and accumulated othercomprehensive income.  Hedgeeffectiveness was assessed at inception and is assessed quarterly,prospectively and retrospectively.  The changes inthe fair value of the first collar are expected to be highly effective inoffsetting the changes in interest rate payments attributable to fluctuationsin the three-month LIBOR rate above and below the first collar’s strike rates.

 

 

12

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

On September 29, 2008, thePartnership executed its second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthlyinterest payments made on the Partnership’s $100.0 million one-month LIBOR-based borrowings (and subsequentrefinancings thereof) due to changes in the one-month LIBOR rate.  Under the second collar, the Partnershipcapped its exposure at a maximum one-month LIBOR rate of 5.50% and established a minimum floor rate of2.70%.  As of March 31, 2010, theone-month LIBOR rate of 0.23% was lower than the floor rate.  As a result, in April 2010, thePartnership remitted to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$206,000 and, at March 31, 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 $3.9 millionand $3.2 millionas of March 31, 2010 and December 31, 2009, respectively, and wererecorded in both other long-term liabilities and accumulated othercomprehensive income in the accompanying consolidated balance sheets.  Hedge effectiveness was assessed at inceptionand is assessed quarterly, prospectively and retrospectively, using theregression analysis.  The changes in the fair value of the secondcollar are expected to be highly effective in offsetting the changes ininterest rate payments attributable to fluctuations in the one-month LIBOR rateabove and below the second collar’s strike rates.

 

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 tohedge the variability in interest payments due to changes in the one-monthLIBOR 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 $1.8 million as of March 31, 2010 and was recorded in otherlong-term liabilities in the accompanying consolidated balance sheets.  The fair value of the swap was an asset ofapproximately $80,000 as of December 31,2009 and was recorded in other long-term assets in the accompanying consolidatedbalance sheets.  Hedge effectiveness wasassessed at inception and will be assessed quarterly, prospectively andretrospectively, using regression analysis. The changes in the fair value of the swap are expected to be highlyeffective in offsetting the changes in interest rate payments attributable tofluctuations in the one-month LIBOR swap curve.

 

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

 
| ** **                    | ** ** | ** **                   | ** ** | ** ** | **March 31,** | ** ** | ** ** | **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 |       | $          | 7,416              |       | $          | 7,047                 |       |
| Forward starting swap         |       | Other long-term  liabilities |       |       | 1,783              |       |       | —                |       |
| Total liability  derivatives  |       |                         |       | $          | 9,199              |       | $          | 7,047                 |       |

 

 

13

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 5.**                      DerivativeFinancial 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 for the three months ended March 31,2010 and 2009 (in thousands):

 
| ** **                   | ** ** | ** **                | ** ** | ** **                      | ** ** | **Recognized in Income** | ** ** |
|------------------------------|------------|---------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **Amount of Gain (Loss)** | ** ** | **on Derivatives**              | ** ** |
| ** **                   | ** ** | **Recognized in Other**   | ** ** | **(Ineffectiveness Portion**    | ** ** |
| ** **                   | ** ** | **Comprehensive Income**  | ** ** | **and Amount Excluded**         | ** ** |
| ** **                   | ** ** | **on Derivatives**        | ** ** | **from Effectiveness Testing)** | ** ** |
| ** **                   | ** ** | **Three Months Ended**    | ** ** | **Three Months Ended**          | ** ** |
| **Derivatives in Cash Flow** | ** ** | **March 31,**        | ** ** | **March 31,**              | ** ** | **March 31,**       | ** ** | **March 31,** | ** ** |
| **Hedging Relationship**     | ** ** | **2010**                  | ** ** | **2009**                        | ** ** | **2010**                 | ** ** | **2009** | ** ** |
|                         |       |                      |       |                            |       |                     |       |   |   |
| Interest  rate collars       |       | $                         | (368       | )                               | $          | 1,152                    |       | $ | — |   | $ | — |   |
| Forward  starting swap       |       |                      | (1,864     | )                               |       | —                   |       |   | — |   |   | — |   |
| Total                        |       | $                         | (2,232     | )                               | $          | 1,152                    |       | $ | — |   | $ | — |   |

 

Ineffectiveness relatedto the interest rate collars and forward starting swap is recognized asinterest expense and was immaterial for the three months ended March 31,2010 and 2009.  The effective portionrelated to the interest rate collars that was originally reported in othercomprehensive income and reclassified to earnings was $1.5 million and$1.1 million for the three months ended March 31, 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 months ended March 31, 2010 and 2009(in thousands):

 
| ** **                        | ** ** | ** **                  | ** ** | **Amount of Gain (Loss)** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | ** **                  | ** ** | **Recognized in Income**  | ** ** |
| ** **                        | ** ** | ** **                  | ** ** | **on Derivatives**        | ** ** |
| ** **                        | ** ** | **Location of Gain (Loss)** | ** ** | **Three Months Ended**    | ** ** |
| **Derivatives Not Designated as** | ** ** | **Recognized in**           | ** ** | **March 31,**        | ** ** | **March 31,** | ** ** |
| **Hedging Instruments**           | ** ** | **Income on Derivatives**   | ** ** | **2010**                  | ** ** | **2009** | ** ** |
|                              |       |                        |       |                      |       |   |   |
| Oil  product contracts            |       | Cost  of sales              |       | $                         | (522       | ) | $ | 3,985 |   |
|                                   |            |                             |            |                           |            |  |  |  |  |

 

**Note 6.**                      Debt

** **

ThePartnership has a senior secured credit agreement (the “Credit Agreement”).  Pursuant to the Credit Agreement, the Partnershipexercised its accordion feature (discussed below) and requested an increase inthe Total WC Revolver Commitment (as defined in the Credit Agreement) inan amount equal to $100.0 million. On December 4, 2009, certain lenders under the Credit Agreementagreed to fund the $100.0 million increase, bringing the total availablecommitments under the Credit Agreement from $750.0 million to$850.0 million.

 

 

14

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 6.       Debt (continued)**

 

Thereare three facilities under the Credit Agreement:

 

·             aworking capital revolving credit facility to be used for working capitalpurposes and letters of credit in the principal amount equal to the lesser ofthe Partnership’s borrowing base and $750.0 million; the $750.0 millionincludes two $50.0 million seasonal overline facilities that are availableeach year only during the period between September 1 and June 30;

 

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

 

·             a $15.0 millionrevolving credit facility to be used for general purposes.

 

Inaddition, the Credit Agreement has an accordion feature whereby the Partnershipmay request on the same terms and conditions of its then existing CreditAgreement, provided no Event of Default (as defined in the Credit Agreement) thenexists, an increase to:  (1) theacquisition facility by up to another $50.0 million, for a totalacquisition facility of up to $135.0 million; and (2) the workingcapital revolving credit facility by up to another $100.0 million, for atotal working capital revolving credit facility of up to $850.0 million.  Any such request for an increase by the Partnershipmust be in a minimum amount of $5.0 million, and no more than three suchrequests may be made for each facility. The Partnership, however, cannot provide assurance that its lendinggroup will agree to fund any request by the Partnership for additional amountsin excess of the total available commitments of $850.0** **million.

 

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

 

Borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe Credit Agreement, as amended, which in turn depends upon the CombinedInterest Coverage Ratio (as such term is defined in the Credit Agreement).  Borrowings under the acquisition and revolving creditfacilities bear interest at (1) the Eurodollar rate plus 2.25% to 2.75%, (2) thecost of funds rate plus 1.75% to 2.25%, or (3) the base rate plus 0.75% to1.25%, each depending on the pricing level provided in the Credit Agreement, asamended, which in turn depends upon the Combined Interest Coverage Ratio.  The average interest ratesfor the Credit Agreement were 3.3% and 3.9% for the three months ended March 31,2010 and 2009, respectively.

 

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

 

 

15

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 6.       Debt (continued)**

 

Further, in October 2009, thePartnership 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 tohedge the variability in interest payments due to changes in the one-monthLIBOR swap curve with respect to $100.0 million of one-month LIBOR-based borrowings at a fixed rateof 3.93%.  See Note 5 for additional information on the interest rate collarsand the forward starting swap.

 

ThePartnership incurs a letter of credit fee of 1.75% per annum for each letter ofcredit issued.  In addition, thePartnership incurs a commitment fee on the unused portion of the threefacilities under the Credit Agreement (including the unused portion of eitherof the seasonal overline facilities exercised by the Partnership) equal to 0.3%to 0.375% per annum, depending on the pricing level and the Combined InterestCoverage Ratio provided in the Credit Agreement.  The Partnership also incurs a facility fee of0.1% per annum on any unexercised seasonal overline facility during the periodbetween September 1 and June 30 and a seasonal overline fee of$30,000 each time the Partnership elects to exercise either of the seasonaloverline facilities.

 

TheCredit Agreement will mature on April 22, 2011.  The Partnership classifies a portion of itsworking capital revolving credit facility as a long-term liability because thePartnership has a multi-year, long-term commitment from its bank group.  The long-term portion of the working capitalrevolving credit facility was $231.4 million and $240.9 million at March 31,2010 and December 31, 2009, respectively, representing the amountsexpected to be outstanding during the year. In addition, the Partnership classifies a portion of its working capitalrevolving credit facility as a current liability because it repays amountsoutstanding and reborrows funds based on its working capital requirements.  The current portion of the working capitalrevolving credit facility was approximately $109.8 million and$221.7 million at March 31, 2010 and December 31, 2009,respectively, representing the amounts the Partnership expects to pay downduring the course of the year.

 

Asof March 31, 2010, the Partnership had total borrowings outstanding underthe Credit Agreement of $412.4 million, including $71.2 millionoutstanding on the acquisition facility. In addition, the Partnership had outstanding letters of credit of$32.8 million.  The total remainingavailability for borrowings and letters of credit at March 31, 2010 and December 31,2009 was $404.8 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, and limitations on the Partnership’s ability togrant liens, make certain loans or investments, incur additional indebtednessor guarantee other indebtedness, make any material change to the nature of thePartnership’s business or undergo a fundamental change, make any materialdispositions, acquire another company, enter into a merger, consolidation, saleleaseback transaction or purchase of assets, or make capital expenditures inexcess of specified levels.

 

TheCredit Agreement imposes financial covenants that require the Partnership tomaintain certain minimum working capital amounts, capital expenditure limits, aminimum EBITDA ratio, a minimum combined interest coverage ratio and a maximumleverage ratio.  On January 26,2010, the lenders under the Credit Agreement consented to increase thePartnership’s capital expenditures limit for the fiscal year ending December 31,2010 from $10.0 million to $20.0 million.  The Partnership was in compliance with theforegoing covenants at March 31, 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).

 

TheCredit Agreement also requires that in each calendar year, the outstandingamount under the working capital revolving credit facility must be equal to orless than $263.0 million for a period of ten consecutive calendar days.

 

 

16

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 6.       Debt (continued)**

 

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

 

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

 

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

** **

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

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**     | ** ** |
| ** **                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Service cost                    |       | $                      | 53         |   | $ | 325 |   |
| Interest cost                   |       | 163                    |       | 229 |   |
| Expected return on plan  assets |       | (169                   | )          | (161 | ) |
| Recognized net actuarial  loss  |       | —                 |       | 48 |   |
| Net periodic benefit cost       |       | $                      | 47         |   | $ | 441 |   |

 

Effective December 31, 2009, the GeneralPartner’s qualified pension plan (the “Plan”) was amended to freezeparticipation in and benefit accruals under the Plan.  Primarily for this reason, the net periodicbenefit cost decreased by approximately $0.4** **millionfor the three months ended March 31, 2010 compared to the same period in2009.

 

**Note 8.**                      Related PartyTransactions

** **

ThePartnership is a party to a Second Amended and Restated Terminal Storage Rentaland Throughput Agreement with Global Petroleum Corp. (“GPC”), an affiliate ofthe Partnership, which extends through December 2013 with annual renewal optionsthereafter.  The agreement is accountedfor as an operating lease.  The expensesunder this agreement totaled approximately $2.2** **millionand $2.1** **million for the three monthsended March 31, 2010 and 2009, respectively.

 

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 $21,870 and $21,500 for the three months ended March 31,2010 and 2009, respectively.  Thesecharges were recorded in selling, general and administrative expenses in theaccompanying consolidated statements of income. The agreement is for an indefinite term, and either party may terminateits receipt of some or all of the services thereunder upon 180 days’ notice atany time after January 1, 2009.  Asof March 31, 2010, no such notice of termination was given by eitherparty.

 

 

17

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 8.**                      Related PartyTransactions (continued)

** **

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 $212,000 for the three months ended March 31,2010 and 2009, respectively.  These feeswere recorded as an offset to selling, general and administrative expenses inthe accompanying consolidated statements of income.  The agreement extends through January 1,2011.

 

ThePartnership sells refined petroleum products to Alliance at prevailing marketprices at the time of delivery.  Sales toAlliance were approximately $7.3 million and $2.7 million for thethree months ended March 31, 2010 and 2009, respectively.

 

TheGeneral Partner employs substantially all of the Partnership’s employees andcharges the Partnership for their services. The expenses for the three months ended March 31, 2010 and 2009,including payroll, payroll taxes and bonus accruals, were $10.4 millionand $12.3 million, respectively. The Partnership also reimburses the General Partner for itscontributions under the General Partner’s 401(k) Savings and ProfitSharing Plan and the General Partner’s qualified and non-qualified pensionplans.

 

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

 
| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Receivables from Alliance                |       | $                  | 938        |                  | $          | 838 | ** ** |
| Receivables from GPC                     |       | 246                |       | 251                   |       |
| Receivables from the General Partner (1) |       | 3,038              |       | 476                   |       |
| Total                                    |       | $                  | 4,222      |                  | $          | 1,565 |   |

 

(1)          Receivables from the General Partnerreflect the Partnership’s prepayment of payroll taxes and payrollaccruals to the General Partner.

 

**Note 9.**                      CashDistributions

** **

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 to the General Partner for any one or more ofthe next 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 minimumquarterly distribution for that quarter; secondly, 98.66% to the common

 

 

18

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 9.**                      CashDistributions (continued)

 

unitholders,pro rata, and 1.34% to the General Partner, until the Partnership distributesfor each outstanding common unit an amount equal to any arrearages in paymentof the minimum quarterly distribution on the common units for any priorquarters during 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 | % |   |

 

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)                              |       | $ 0.4875                         |       | $ 3,621      |       | $ 2,751            |       | $ 112           |       | $    50 |       | $    6,534    |       |

 

(1)         This distribution of $0.4875 per unitresulted in the Partnership reaching its second target distribution for thefourth quarter of 2009.  As a result, theGeneral Partner, as the holder of the IDRs, received this additional incentivedistribution.

 

Inaddition, on April 21, 2010, the board of directors of the General Partnerdeclared a quarterly cash distribution of $0.4875 per unit for the period from January 1,2010 through March 31, 2010 ($1.95 per unit on an annualized basis).  On May 14, 2010, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business May 5, 2010.  Thisdistribution will result in the Partnership reaching its second targetdistribution for the quarter ended March 31, 2010.

 

**Note 10.**               Segment Reporting

** **

ThePartnership is a wholesale and commercial distributor of gasoline, distillatesand residual oil whose business is organized within two operating segments,Wholesale and Commercial, based on the way the chief operating decision maker(CEO) manages the business and on the similarity of customers and expectedlong-term financial performance of each segment.  The accounting policies of the segments arethe same as those described in Note 2, “Summary of Significant AccountingPolicies,” in the Partnership’s Annual Report on Form 10-K for the yearended December 31, 2009.

 

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

 

 

19

----

** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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

 

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

 

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

 
| ** **                                  | ** ** | **Three Months Ended** |
|---------------------------------------------|------------|------------------------|
| ** **                                  | ** ** | **March 31,**     |
| ** **                                  | ** ** | **2010**               |   | **2009** |
| **Wholesale Segment:**                      |       |                   |   |   |
| Sales                                       |       |                   |   |   |
| Distillates                                 |       | $                      | 959,257 |   | $ | 1,006,616 |
| Gasoline                                    |       | 872,326                |   | 501,659 |
| Residual oil                                |       | 12,129                 |   | 11,490 |
| Total                                       |       | $                      | 1,843,712 |   | $ | 1,519,765 |
| Net product margin (1)                      |       |                   |   |   |
| Distillates                                 |       | $                      | 34,020 |   | $ | 33,853 |
| Gasoline                                    |       | 6,350                  |   | 11,786 |
| Residual oil                                |       | 2,856                  |   | 2,820 |
| Total                                       |       | $                      | 43,226 |   | $ | 48,459 |
| **Commercial Segment:**                     |       |                   |   |   |
| Sales                                       |       | $                      | 118,672 |   | $ | 113,190 |
| Net product margin (1)                      |       | $                      | 4,918 |   | $ | 4,928 |
| **Combined sales and net product  margin:** |       |                   |   |   |
| Sales                                       |       | $                      | 1,962,384 |   | $ | 1,632,955 |
| Net product margin (1)                      |       | $                      | 48,144 |   | $ | 53,387 |
| Depreciation allocated to  cost of sales    |       | 2,737                  |   | 2,673 |
| **Combined gross profit**                   |       | $                      | 45,407 |   | $ | 50,714 |

 

----

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

 

 

20

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

 

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

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Combined gross profit**                                               |       | $                                | 45,407     |   | $ | 50,714 |   |
| **Operating costs and expenses  not allocated to reportable segments:** |       |                             |       |   |   |
| Selling, general and  administrative expenses                           |       | 16,578                           |       | 18,075 |   |
| Operating expenses                                                      |       | 8,659                            |       | 8,475 |   |
| Amortization expenses                                                   |       | 691                              |       | 800 |   |
| **Total operating costs and  expenses**                                 |       | 25,928                           |       | 27,350 |   |
| Operating income                                                        |       | 19,479                           |       | 23,364 |   |
| Interest expense                                                        |       | (4,064                           | )          | (3,776 | ) |
| Income tax expense                                                      |       | (387                             | )          | (725 | ) |
| **Net income**                                                          |       | $                                | 15,028     |   | $ | 18,863 |   |

 

Therewere no foreign sales for the three months ended March 31, 2010 and2009.  The Partnership has no foreignassets.

 

**Note 11.**               Environmental Liabilities

** **

ThePartnership currently owns or leases properties where refined petroleumproducts are being or have been handled. These properties and the refined petroleum products handled thereon maybe subject to federal and state environmental laws and regulations.  Under such laws and regulations, thePartnership could be required to remove or remediate containerized hazardous liquidsor associated generated wastes (including wastes disposed of or abandoned byprior owners or operators), to clean up contaminated property arising from therelease of liquids or wastes to the environment, including contaminatedgroundwater, or to implement best management practices to prevent futurecontamination.

 

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

 

In connection with the November 2007 acquisition of ExxonMobil’sGlenwood Landing and Inwood, New York terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations underremedial action plans submitted by ExxonMobil to and approved by the New YorkDepartment of Environmental Conservation (“NYDEC”) with respect to bothterminals.  As a result, the Partnershiprecorded, on an undiscounted basis, total environmental liabilities ofapproximately $1.2 million, of which approximately $0.7 million waspaid by the Partnership as of March 31, 2010.  The remaining liability of $0.5 millionwas recorded as a current liability of $0.4 million and a long-termliability of $0.1 million in the accompanying consolidated balance sheetat March 31, 2010.  The Partnershiphas implemented the remedial action plans and does not believe that compliancewith the terms thereof will result in material costs in excess of theenvironmental reserve or have a material impact on its operations.

 

 

21

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 11.**               Environmental Liabilities(continued)

** **

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 March 31, 2010, this liability had abalance of $5.0 million which was recorded as a current liability of$2.9 million and a long-term liability of $2.1 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.

 

Inconnection with the 2006 acquisition of its Macungie, Pennsylvania terminal(the “Global Macungie Terminal”), the Partnership assumed certain existingenvironmental liabilities at the terminal. The Partnership did not accrue for these contingencies as it believesthat the aggregate amount of these liabilities cannot be reasonably estimatedat this time.  The Partnership alsoexecuted an Administrative Order on Consent (“AOC”) with the U.S. EnvironmentalProtection Agency, Region III (“EPA, Region III”) requiring certaininvestigatory activities at the Global Macungie Terminal.  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 Partnershipintends to request that EPA, Region III issue a Notice of Completion withrespect to the AOC.  Although thePartnership cannot predict whether EPA, Region III will grant this request,based upon current information, the Partnership does not anticipate that theoutcome will have a material adverse effect on it.  Furthermore, the Partnership does not believethat in the event EPA, Region III requests additional activities before issuinga Notice of Completion, those activities will result in material costs or havea material impact on the Partnership’s operations.

 

ThePartnership’s estimates used in these reserves are based on all known facts atthe time and its assessment of the ultimate remedial action outcomes.  Among the many uncertainties that impact thePartnership’s estimates are the necessary regulatory approvals for, andpotential modification of, its remediation plans, the amount of data availableupon initial assessment of the impact of soil or water contamination, changesin costs associated with environmental remediation services and equipment andthe possibility of existing legal claims giving rise to additional claims.  Therefore, although the Partnership believesthat 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 12.**               Long-Term Incentive Plan

** **

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

 

 

22

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

*Long-Term Incentive Plan*

 

OnAugust 14, 2007, the Compensation Committee of the board of directors ofthe General Partner granted awards of phantom units and associated DERs underthe LTIP to certain employees and non-employee directors of the GeneralPartner.  The phantom units grantedvested on December 31, 2009 and became payable on a one-for-one basis incommon units 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 expense with respect to these awards ofapproximately $0.2 million for the three months ended March 31, 2009which is included in selling, general and administrative expenses in theaccompanying consolidated statements of income. The total compensation cost related to these awards was fully recognizedas of December 31, 2009.  In March 2010,the Partnership distributed 62,620 common units in settlement of this award,and in April 2010, the Partnership paid approximately $305,000 inassociated DERs.

 

*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 on June 30and December 31 of each year commencing June 30, 2009.  Compensation expense related to these phantomunits is recognized using the accelerated attribution method.  The Partnership recorded compensation expenserelated to this phantom unit award of approximately $89,000 and $230,000 forthe three months ended March 31, 2010 and 2009, respectively, which isincluded in selling, general and administrative expenses in the accompanyingconsolidated statements of income.  Thetotal compensation cost related to the non-vested awards not yet recognized at March 31,2010 is approximately $0.3 million and is expected to be recognized overthe remaining requisite service period. On June 30, 2009, 16,617 common units vested under this award andwere distributed to the named executive officer, and in July 2009, thePartnership paid a cash distribution related to these units of approximately$8,000.  On December 31, 2009,16,617 common units vested under this award and were distributed, and in January 2010,the Partnership paid a cash distribution related to these units ofapproximately $32,000.

 

*Five-Year Phantom Units*

 

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

 

Allor a portion of the phantom units granted to the employees may vest earlierthan December 31, 2013 if the Average Unit Price (as defined below) equalsor exceeds specified target prices during specified periods.  Specifically, if the Average Unit Priceequals or exceeds: (i) $21.00 at any time prior to December 31, 2013,then 25% of the phantom units will automatically vest; (ii) $27.00 at anytime during the period from February 5, 2011 through December 31,2013, then an additional 25% of the phantom units will automatically vest; and (iii) $34.00at any time during the period from June 5, 2012 through December 31,2013, then all of the remaining phantom units will automatically vest. “AverageUnit Price” means the closing market price of the Partnership’s common unitsfor any 10-consecutive trading day period. On August 21, 2009, the Average Unit Price of $21.00 per unit forthe first tranche was achieved and, as a result, 25% of the phantom unitsvested at a price of $22.50 per unit.

 

 

23

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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 compensation expenserelated to this phantom unit award of approximately $39,000 and $111,000 forthe three months ended March 31, 2010 and 2009, respectively, which isincluded in selling, general and administrative expenses in the accompanyingconsolidated statements of income.  Thetotal compensation cost related to the non-vested awards not yet recognized at March 31,2010 is approximately $0.6 million and is expected to be recognizedratably over the remaining derived service periods.

 

*Repurchase Program*

 

InMay 2009, the board of directors of the General Partner authorized therepurchase of the Partnership’s common units (the “Repurchase Program”) for the purpose of assisting it in meeting the GeneralPartner’s anticipated obligations to deliver common units under the LTIP andmeeting the General Partner’s obligations under existing employment agreementsand other employment related obligations of the General Partner (collectively,the “General Partner’s Obligations”). The Partnership is authorized to spend up to $6.6 million to acquire up to 445,000 of its common units inthe aggregate, over an extended period of time, consistent with the GeneralPartner’s Obligations.  Common units ofthe Partnership may be repurchased from time to time in open markettransactions, 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.  As of March 31,2010, the General Partner repurchased 195,291 common units pursuant to theRepurchase Program for approximately $4.0 million, of which 62,620 phantom units vested under the *“Long-Term Incentive Plan,”* 33,234 phantom units vestedunder the *“**Three-Year Phantom Units”* award and69,444 phantom units vested under the “*Five-Year Phantom Units”*award.

 

AtMarch 31, 2010 and December 31, 2009, common units outstandingexcluded 63,444 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.

 

*Status of Non-Vested Units*

 

The following tablepresents a summary of the status of the non-vested units as of March 31,2010:

 
| ** **                                            | ** ** | **Number of  Non-vested  Units** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------------|------------|
| Outstanding non-vested  units at January 1, 2010 |       |                                  | 337,419    |                                                    | $          | 6.05 |   |
| Granted                                               |       |                                  | —     |                                                    | —     |   |
| Vested                                                |       |                                  | —     |                                                    | —     |   |
| Forfeited                                             |       |                                  | —     |                                                    | —     |   |
| Outstanding non-vested  units at March 31, 2010  |       |                                  | 337,419    |                                                    | $          | 6.05 |   |

 

 

24

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 13.**               Fair Value Measurements

** **

Certain of thePartnership’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.  The Financial Accounting Standards Board (“FASB”)established a fair value hierarchy, which prioritizes the inputs used inmeasuring fair value into the following three levels:

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

 

The following tablepresents those financial assets and financial liabilities measured at fairvalue on a recurring basis as of March 31, 2010 (in thousands):

 
| ** **                                   | ** ** | ** ** | **Fair Value** | ** ** | ** ** | ** **                                       |
|----------------------------------------------|------------|------------|---------------------|------------|------------|--------------------------------------------------|
| ** **                                   | ** ** | ** ** | **March 31,**  | ** ** | ** ** | **Fair Value Measurements Using** | ** ** |
| ** **                                   | ** ** | ** ** | **2010**            | ** ** | ** ** | **Level 1**                                 | ** ** | ** ** | **Level 2** | ** ** | ** ** | **Level 3** | ** ** |
| **Assets:**                                  |       |       |                |       |       |                                             |   |   |   |   |   |   |
| Hedged inventories                           |       |       | $                   | 460,631    |       |                                             | $ | — |   |   |   | $ | 460,631 |   |   | $ | — |   |
| Fair value of forward fixed price contracts  |       |       | 12,730              |       |       | —                                           |   |   |   | 12,730 |   |   | — |   |
| Swap agreements and option contracts         |       |       | 1,382               |       |       | 858                                              |   |   |   | 524 |   |   | — |   |
| Total                                        |       |       | $                   | 474,743    |       |                                             | $ | 858 |   |   |   | $ | 473,885 |   |   | $ | — |   |
|                                         |       |       |                |       |       |                                             |   |   |   |   |   |   |   |   |
| **Liabilities:**                             |       |       |                |       |       |                                             |   |   |   |   |   |   |   |   |
| Obligations on forward fixed price contracts |       |       | $                   | (19,380    | )          |                                             | $ | — |   |   |   | $ | (19,380 | ) |   | $ | — |   |
| Swap agreements and option contracts         |       |       | (599                | )          |       | (13                                              | ) |   |   | (586 | ) |   | — |   |
| Interest rate collars                        |       |       | (7,416              | )          |       | —                                           |   |   |   | (7,416 | ) |   | — |   |
| Forward starting swap                        |       |       | (1,783              | )          |       | —                                           |   |   |   | (1,783 | ) |   | — |   |
| Total liabilities                            |       |       | $                   | (29,178    | )          |                                             | $ | (13 | ) |   |   | $ | (29,165 | ) |   | $ | — |   |
|                                              |            |            |                     |            |            |                                                  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The majority of thePartnership’s derivatives outstanding are reported at fair value based marketquotes that are deemed to be observable inputs in an active market for similarassets and liabilities and are considered Level 2 inputs for purposes offair value disclosures.  Specifically,the fair values of the Partnership’s financial assets and financial liabilitiesprovided above were derived from NYMEX and New York Harbor quotes for thePartnership’s hedged inventories, forward fixed price contracts, swap agreementsand option contracts and from the LIBOR rates for the Partnership’s interestrate collars and forward starting swap. The Partnership has not changed its valuation techniques or inputsduring the quarter ended March 31, 2010.

 

For assets and liabilitiesmeasured on a non-recurring basis during the period, accounting guidancerequires quantitative disclosures about the fair value measurements separatelyfor each major category.  During thequarter ended March 31, 2010, the Partnership did not remeasure assets orliabilities at fair value on a non-recurring basis.

 

*Financial Instruments*

 

Thefair value of the Partnership’s financial instruments approximated the carryingvalue as of March 31, 2010 and December 31, 2009, in each case due tothe short-term and the variable interest rate nature of the financialinstruments.

 

 

25

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 14.**               Unitholders’ Equity

** **

On March 16, 2010,the Partnership entered into an Underwriting Agreement (the “UnderwritingAgreement”) relating to the public offering of 3,400,000 common unitsrepresenting limited partner interests in the Partnership (the “Common Units”),at a public offering price of $22.75, less underwriting discounts andcommissions of $1.00 per Common Unit. Pursuant to the Underwriting Agreement, the Partnership also granted theunderwriters an option to purchase an additional 510,000 Common Units from thePartnership at the same price, which option has been exercised.  OnMarch 19, 2010, the Partnership completed the public offering of the3,910,000 Common Units for approximately $89.0 million.  The net proceeds from the offering of $84.8 million,after deducting approximately $4.2 million in underwriting fees and offering expenses, wereused to reduce indebtedness under the Partnership’s Credit Agreement.

 

**Note 15.**               Income Taxes

** **

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

 
| ** **                                         | ** ** | **Three  Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Federal statutory income  tax rate                 |       | 34.                                     | 0%         |   | 34. | 0% |   |
| State income tax rate, net  of federal tax benefit |       | 6.                                      | 4%         |   | 6. | 4% |   |
| Partnership income not  subject to tax             |       | (37.                                    | 9)%        |   | (36. | 7)% |   |
| Effective income tax rate                          |       | 2.                                      | 5%         |   | 3. | 7% |   |

 

**Note 16.**               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 11 includedherein, the Partnership is not aware of any significant legal or governmentalproceedings against it, or contemplated to be brought against it.  The Partnership maintains insurance policieswith insurers in amounts and with coverage and deductibles as the GeneralPartner believes are reasonable and prudent. However, the Partnership can provide no assurance that this insurancewill be adequate to protect it from all material expenses related to potentialfuture claims or that these levels of insurance will be available in the futureat economically acceptable prices.

 

***Other***

 

On October 22, 2009,the Federal Trade Commission (“FTC”) issued a Civil Investigative Demand and aSubpoena Duces Tecum in connection with the FTC’s regulatory review of thePartnership’s planned acquisition of three refined petroleum terminalfacilities in Newburgh, New York from Warex Terminals Corporation.  InApril 2010, the FTC closed its regulatory review and determined that nofurther action is warranted by the FTC. The Partnership currently expects to close the transaction by the thirdquarter of 2010.

 

 

26

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** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**Note 16.**               Legal Proceedings(continued)

 

Certain of thePartnership’s employees at its terminal in Oyster Bay (Commander), New Yorkwere employed under a collective bargaining agreement that expired in April 2010.  On February 25, 2010, the Partnershipreceived a petition filed with the National Labor Relations Board (“NLRB”) bythe union representing certain employees assigned to Glenwood Landing andInwood, New York (“Local 419”) seeking to replace the incumbent union atthe Partnership’s Oyster Bay, New York terminal (“Local 355”) with respectto certain hourly employees.  On March 1,2010, Local 355 filed a disclaimer of representation with the NLRB withrespect to the Oyster Bay hourly employees. A representation election was held in April 2010 pursuant to theterms of a Stipulated Election Agreement with Local 419 with respect tothese employees.  Local 419 waselected as the representative of these employees, and the Partnership willnegotiate a new collective bargaining agreement with Local 419.  The Partnership does not believe the resultsof these negotiations will have a material adverse effect on its operations.

 

**Note 17.**               New Accounting Standard

 

In January 2010,guidance issued by the FASB related to fair value measurements and disclosurewas updated to require additional disclosures related to transfers in and outof Level 1 and Level 2 fair value measurements and enhanced detail inthe Level 3 reconciliation.  Thisguidance clarifies the level of disaggregation required for assets andliabilities and the disclosures required for inputs and valuation techniquesused to measure the fair value of assets and liabilities that fall in eitherLevel 2 or Level 3.  Theupdated guidance was effective for the Partnership on January 1, 2010,with the exception of the Level 3 disaggregation which is effective forthe Partnership on January 1, 2011. The adoption had no impact on the Partnership’s consolidated financialstatements.  See Note 13 for detailsregarding the Partnership’s assets and liabilities measured at fair value.

 

**Note 18.**               Subsequent Events

 

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 March 31, 2010 that requiredrecognition or disclosure in the accompanying financial statements.

 

OnApril 20, 2010, the board of directors of the General Partner granted1,200 phantom units under the LTIP to each of the three independentdirectors.  The phantom units vest on December 31,2010.

 

OnApril 21, 2010, theboard of directors of the General Partner declared a quarterly cashdistribution of $0.4875 per unit ($1.95 per unit on an annualized basis) forthe period from January 1, 2010 through March 31, 2010.  On May 14, 2010, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business May 5, 2010.

 

 

27

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

 

The following discussion and analysis of financialcondition and results of operations of Global Partners LP should be read inconjunction with the historical consolidated financial statements of GlobalPartners LP and 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 relate strictly tohistorical or current facts and include, without limitation, any statementthat may project, indicate or imply future results, events, performance orachievements, and may contain the words “may,” “believe,” “should,” “could,” “expect,”“anticipate,” “plan,” “intend,” “estimate,” “foresee,” “continue,” “will likelyresult,” 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 notguarantees of performance.  Although webelieve these forward-looking statements are based on reasonable assumptions,statements made regarding future results are subject to a number of assumptions,uncertainties and risks, many of which are beyond our control, which may causefuture results to be materially different from the results stated or implied inthis document.  These risks anduncertainties include, among other things:

 

·              Wemay not have sufficient cash from operations to enable us to pay the minimumquarterly distribution or maintain distributions at current levels followingestablishment of cash reserves and payment of fees and expenses, includingpayments to our general partner.

 

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

 

·              Oursales of home heating oil and residual oil could be significantly reduced byconversions to natural gas which conversions could have an adverse effect onour financial condition, results of operations and cash available fordistribution to our unitholders.

 

·              Warmerweather conditions could adversely affect our financial condition, results ofoperations and cash available for distribution to our unitholders.

 

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

 

·              Ourresults of operations are influenced by the overall forward market for refinedpetroleum products, and increases and/or decreases in the prices of refinedpetroleum products may adversely impact the amount of borrowing available forworking capital under our credit agreement, which credit agreement hasborrowing base limitations and advance rates.

 

·              Weare exposed to trade credit risk in the ordinary course of our businessactivities.

 

·              Weare exposed to risk associated with our trade credit support in the ordinarycourse of our business activities.

 

·              Thecondition of credit markets may adversely affect our liquidity.

 

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

 

·              Weare exposed to performance risk in our supply chain.

 

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

 

 

28

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·              Unitholdershave limited voting rights and are not entitled to elect our general partner orits directors or to remove our general partner without the consent of theholders of at least 66 2/3% of the outstanding units (including units held byour general partner and its affiliates), which could lower the trading price ofour common units.

 

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

 

Additionalinformation about risks and uncertainties that could cause actual results todiffer materially from forward-looking statements is contained in Part I,Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for theyear ended December 31, 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-lookingstatements speak 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 New England and New York.  For the three months ended March 31,2010, we sold approximately $2.0 billion of refined petroleum products andsmall amounts of natural gas.

 

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

 

OnDecember 9, 2009, our general partner entered into the Third Amended andRestated Agreement of Limited Partnership of the Partnership (the “PartnershipAgreement”).  The Partnership Agreementamended the Second Amended and Restated Agreement of Limited Partnership of thePartnership, dated May 9, 2007, as amended, to: (i) replace the terms“operating surplus” and “adjusted operating surplus” with the term “distributablecash flow” and thereby eliminate the term “working capital borrowings,” (ii) increasethe minimum quarterly distribution, prospectively, from $0.4125 to $0.4625 perunit per quarter; and (iii) remove the provisions that previouslypermitted early conversion of a portion of the subordinated units and restatethe provisions governing conversion of the subordinated units usingdistributable cash flow to test whether we have “earned” the minimum quarterlydistribution.

 

***Productsand Operational Structure***

*** ***

Ourproducts include gasoline, distillates and residual oil.  We sell gasoline to unbranded retail gasolinestations and other resellers of transportation fuels.  The distillates we sell are used primarilyfor fuel for trucks and off-road construction equipment and for space heating ofresidential and commercial buildings.  Wesell residual oil to major housing units, such as public housing authorities,colleges and hospitals and large industrial facilities that use processed steamin their manufacturing processes.  Inaddition, we sell bunker fuel, which we can custom blend, to cruise ships, bulkcarriers and fishing fleets.  We haveincreased our sales in the non-weather sensitive components of our business,such as transportation fuels; however, we are still subject to the impact thatwarmer weather conditions may have on our home heating oil and residual oilsales.

 

 

29

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Ourbusiness is divided into two segments:

 

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

 

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

 

Ourbusiness activities are substantially comprised of purchasing, storing,terminalling and selling refined petroleum products.  In a contango market (when product prices forfuture deliveries are higher than for current deliveries), we may use ourstorage capacity to improve our margins by storing products we have purchasedat lower prices in the current market for delivery to customers at higherprices in the future.  In a backwardatedmarket (when product prices for future deliveries are lower than currentdeliveries), we attempt to minimize our inventories to reduce commodity riskand maintain or increase net product margins. See Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-Kfor the year ended December 31, 2009 for additional informationrelated 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 adversely affect ourliquidity. *In therecent past, 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 provide collateral.  In addition, we could experience a tighteningof trade credit from our suppliers.

 

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

 

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

 

 

30

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

 

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

 

·              *Our financial conditionand results of operations are influenced by the overall forward market forrefined petroleum products, and increases and/or decreases in the prices ofrefined petroleum products may adversely impact the amount of borrowingavailable for working capital under our credit agreement, which creditagreement has borrowing base limitations and advance rates*.  Results from our purchasing, storing,terminalling and selling operations are influenced by prices for refinedpetroleum products, pricing volatility and the market for such products.  Prices in the overall forward market forrefined petroleum products may impact our ability to execute advantageouspurchasing opportunities.  In a contangomarket (when product prices for future deliveries are higher than for currentdeliveries), we may use our storage capacity to improve our margins by storingproducts we have purchased at lower prices in the current market for deliveryto customers at higher prices in the future. In a backwardated market (when product prices for future deliveries arelower than current deliveries), we attempt to minimize our inventories toreduce commodity risk and maintain or increase net product margins.  When prices for refined petroleum productsrise, some of our customers may have insufficient credit to purchase supplyfrom us at their historical purchase volumes, and their customers, in turn, mayadopt conservation measures which reduce consumption, thereby reducing demandfor product.  Furthermore, when pricesincrease rapidly and dramatically, we may be unable to promptly pass ouradditional costs to our customers, resulting in lower margins for us whichcould adversely affect our results of operation.  Lastly, higher prices for refined petroleumproducts may (1) diminish our access to trade credit support and/or causeit to become more expensive and (2) decrease the amount of borrowingsavailable for working capital under our credit agreement as a result of totalavailable commitments, borrowing base limitations and advance ratesthereunder.  In addition, when prices forrefined petroleum products decline, our exposure to risk of loss in the eventof nonperformance by our customers of our forward contracts may be increased asthey and/or their customers may breach their contracts and purchase refinedpetroleum products at the then lower spot and/or retail market price.  Furthermore, lower prices for refinedpetroleum products may diminish the amount of borrowings available for workingcapital under our working capital revolving credit facility as a result ofborrowing base limitations.

 

·              *New, stricterenvironmental laws and regulations could significantly increase our costs,which could adversely affect our results of operations and financial condition.*  Our operations are subject to federal, state andlocal laws and regulations regulating product quality specifications and otherenvironmental matters.  The trend inenvironmental 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.

 

 

31

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**Results of Operations**

 

***EvaluatingOur Results of Operations***

 

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

 

*Net Product Margin*

* *

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

 

*Gross Profit*

 

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

 

*Selling, General andAdministrative Expenses*

* *

OurSG&A expenses include, 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.

 

*Operating Expenses*

* *

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

 

*Degree Day*

* *

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

 

 

32

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*NetIncome Per Diluted Limited Partner Unit*

 

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

 

*EBITDA*

* *

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

 

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

 

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

 

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

 

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

 

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

 

EBITDAshould not be considered as an alternative to net income, operating income,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.

 

*Distributable Cash Flow*

* *

Distributablecash flow is an important non-GAAP financial measure for our limited partnerssince it serves as an indicator of our success in providing a cash return ontheir investment.  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.

 

 

33

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***Threemonths ended March 31, 2010 and 2009***

 

Duringthe three months ended March 31, 2010, we experienced the followingevents:

 

·                  Refinedpetroleum product prices dramatically increased during the first quarter of2010 compared to the same period in 2009.

 

·                  Thefirst quarter of 2010 was marked by significant margin pressure in the gasolinemarket compared to the first quarter of 2009.

 

·                  Temperaturesfor the three months ended March 31, 2010 were 9% warmer than normal and12% warmer than the first quarter of 2009.

 

·                  Wedecreased our reserve for credit losses by $450,000 for the three months ended March 31,2010 compared to the same period in 2009.

 

·                  Webelieve heating oil conservation continued during the three months ended March 31,2010.

 

Thefollowing table provides the prices of and percentage increases in refinedpetroleum product and natural gas prices at March 31, 2010 as compared to March 31,2009:

 
| **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%                                                 |   |

 

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

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

***(3)  Source: Platts Gas Daily Report (Tennessee zone delivered)***

 

 

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*** ***

***KeyPerformance Indicators***

*** ***

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

 

| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **March 31,**     | ** ** |
| ** **                                             | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net income                                             |       | $                      | 15,028     |   | $ | 18,863 |   |
|                                                   |       |                   |       |   |   |
| Net income per diluted limited partner unit (1)        |       | $                      | 1.06       |   | $ | 1.40 |   |
|                                                   |       |                   |       |   |   |
| EBITDA (2)                                             |       | $                      | 23,528     |   | $ | 27,366 |   |
|                                                   |       |                   |       |   |   |
| Distributable cash flow  (3)                           |       | $                      | 18,593     |   | $ | 21,996 |   |
|                                                   |       |                   |       |   |   |
| **Wholesale Segment:**                                 |       |                   |       |   |   |
| Volume (gallons)                                       |       | 891,032                |       | 1,038,619 |   |
| Sales                                                  |       |                   |       |   |   |
| Distillates                                            |       | $                      | 959,257    |   | $ | 1,006,616 |   |
| Gasoline                                               |       | 872,326                |       | 501,659 |   |
| Residual oil                                           |       | 12,129                 |       | 11,490 |   |
| Total                                                  |       | $                      | 1,843,712  |   | $ | 1,519,765 |   |
| Net product margin (4)                                 |       |                   |       |   |   |
| Distillates                                            |       | $                      | 34,020     |   | $ | 33,853 |   |
| Gasoline                                               |       | 6,350                  |       | 11,786 |   |
| Residual oil                                           |       | 2,856                  |       | 2,820 |   |
| Total                                                  |       | $                      | 43,226     |   | $ | 48,459 |   |
| **Commercial Segment:**                                |       |                   |       |   |   |
| Volume (gallons)                                       |       | 68,301                 |       | 75,728 |   |
| Sales                                                  |       | $                      | 118,672    |   | $ | 113,190 |   |
| Net product margin (4)                                 |       | $                      | 4,918      |   | $ | 4,928 |   |
| **Combined sales and net product  margin:**            |       |                   |       |   |   |
| Sales                                                  |       | $                      | 1,962,384  |   | $ | 1,632,955 |   |
| Net product margin (4)                                 |       | $                      | 48,144     |   | $ | 53,387 |   |
| Depreciation allocated to  cost of sales               |       | 2,737                  |       | 2,673 |   |
| **Combined gross profit**                              |       | $                      | 45,407     |   | $ | 50,714 |   |
|                                                   |       |                   |       |   |   |
| **Weather conditions:**                                |       |                   |       |   |   |
| Normal heating degree days                             |       | 2,870                  |       | 2,870 |   |
| Actual heating degree days                             |       | 2,624                  |       | 2,977 |   |
| Variance from normal  heating degree days              |       | (9%                    | )          | 4% |   |
| Variance from prior period  actual heating degree days |       | (12%                   | )          | 9% |   |

 

----

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

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

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

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

 

 

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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** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**     | ** ** |
| ** **                                                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Reconciliation of net income to EBITDA:**                                 |       |                   |       |   |   |
| Net income                                                                  |       | $                      | 15,028     |   | $ | 18,863 |   |
| Depreciation and amortization and amortization of  deferred financing fees  |       | 4,049                  |       | 4,002 |   |
| Interest expense                                                            |       | 4,064                  |       | 3,776 |   |
| Income tax expense                                                          |       | 387                    |       | 725 |   |
| EBITDA                                                                      |       | $                      | 23,528     |   | $ | 27,366 |   |
|                                                                        |       |                   |       |   |   |
| **Reconciliation of net cash provided by operating  activities to EBITDA:** |       |                   |       |   |   |
| Net cash provided by operating activities                                   |       | $                      | 45,494     |   | $ | 111,230 |   |
| Net changes in operating assets and liabilities and  certain non-cash items |       | (26,417                | )          | (88,365 | ) |
| Interest expense                                                            |       | 4,064                  |       | 3,776 |   |
| Income tax expense                                                          |       | 387                    |       | 725 |   |
| EBITDA                                                                      |       | $                      | 23,528     |   | $ | 27,366 |   |

 

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

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**     | ** ** |
| ** **                                                                                   | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Reconciliation of net income to  distributable cash flow:**                                |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 15,028     |   | $ | 18,863 |   |
| Depreciation and  amortization and  amortization of deferred financing fees                  |       | 4,049                  |       | 4,002 |   |
| Maintenance capital  expenditures                                                            |       | (484                   | )          | (869 | ) |
| Distributable cash flow                                                                      |       | $                      | 18,593     |   | $ | 21,996 |   |
|                                                                                         |       |                   |       |   |   |
| **Reconciliation of net cash provided by operating  activities to distributable cash flow:** |       |                   |       |   |   |
| Net cash provided by  operating activities                                                   |       | $                      | 45,494     |   | $ | 111,230 |   |
| Net changes in operating  assets and liabilities and certain non-cash items                  |       | (26,417                | )          | (88,365 | ) |
| Maintenance capital  expenditures                                                            |       | (484                   | )          | (869 | ) |
| Distributable cash flow                                                                      |       | $                      | 18,593     |   | $ | 21,996 |   |

 

***Consolidated Results***

 

Ourtotal sales for three months ended March 31, 2010 increased by$329.4 million, or 20%, to $1,962.4 million compared to$1,633.0 million for the same period in 2009.  Theincrease was driven primarily by significantly higher refined petroleum productprices for the three months ended March 31, 2010 compared to the sameperiod in 2009.  Our aggregate volume ofproduct sold decreased by approximately 155 million gallons, or 14%, to 959** **million gallons.  The decrease in volume primarily includesdecreases of approximately 173 million gallons and 19 million gallons in distillates and residual oil, respectively, attributable to warmertemperatures during the first quarter of 2010 compared to the same period in2009, increased competition in the marketplace, continued conservation andeconomic conditions.  The decrease involume sold was offset by a 28** **milliongallon increase in gasoline.  Our gross profit for the first quarterof 2010 was $45.4** **million, a decrease of $5.3** **million, or 10%, compared to $50.7** **millionfor the same period in 2009, primarily due to a lower net product margin ingasoline.

 

 

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* *

*Wholesale Segment*

* *

Distillates.  Wholesale distillate sales for the threemonths ended March 31, 2010 were $959.3 million compared to$1,006.6 million for the three months ended March 31, 2009.  The decrease of $47.3 million, or 5%,was due to a 171 million gallon decrease in volume sold due to warmer temperatures during the firstquarter of 2010 compared to the same period in 2009, increased competition inthe marketplace, continued conservation and economic conditions, despite theincrease in refined petroleum product prices. Our net product margin from distillate sales increased, however, by$0.1 million to $34.0 million for the three months ended March 31,2010 compared to $33.9 million for the same period in 2009, primarilyattributable to improved unit margins through sales and inventory managementand favorable market conditions.

 

Gasoline.  Wholesale gasoline sales for the three monthsended March 31, 2010 were $872.3 million compared to $501.7 million forthe same period in 2009.  The increase of$370.6 million, or 74%, was due primarily tosignificantly higher gasoline prices and an increase in gasoline volume soldcompared to the prior year.  The increase in gasoline volume was due tosome select selling opportunities during the quarter.  Our net product margin from gasolinesales decreased by $5.4 million to $6.4 million compared to$11.8 million for the three months ended March 31, 2009, primarilyattributable to market pressure in the gasoline markets and unfavorable marketconditions.

 

ResidualOil.  Wholesale residualoil sales for the three months ended March 31, 2010 were$12.1 million compared to $11.5 million for the three months ended March 31,2009.  The increase of $0.6 million,or 5%, was primarily due to the increase in refined petroleum product prices,despite a 5 million gallon decrease in residual oil volume sold.  The decrease in volume sold was primarily dueto warmer temperatures during the first quarter of 2010 compared to same periodin 2009, *continuedconservation, economic conditions and conversion and fuel switching due to thecomparative price advantage of natural gas over residual oil.*  Our netproduct margin contribution from residual oil sales was relatively flat at$2.8 million for each of the three months ended March 31, 2010 and2009.

 

*Commercial Segment*

* *

Inour Commercial segment, residual oil accounted for approximately 54% and 67% oftotal commercial volume sold for the three months ended March 31, 2010 and2009, respectively.  Distillates,gasoline and natural gas accounted for the remainder of the total volume sold.

 

Commercialresidual oil sales and volume sold for the three months ended March 31,2010 decreased by less than 1% and by 28%, respectively, compared to the sameperiod in 2009.  We attribute thedecreases in sales and volume sold to the competitive pricing from natural gasand reductions in production by certain industry participants in our markets.

 

*Selling, General and Administrative Expenses*

 

SG&Aexpenses decreased by $1.5 million, or 8%, to $16.6 million for thethree months ended March 31, 2010 compared to $18.1 million for thesame period in 2009.  The decrease wasprimarily due to decreases of $3.9 million in incentive compensation,$0.4 million in bad debt accruals and $0.2 million in compensationcost under the LTIP, offset by increases of $1.3 million in salaries,$0.8 million in professional fees, $0.3 million in costs associatedwith the expansion of our natural gas operations, $0.3 million in projectdevelopment costs and $0.3 million in various other SG&Aexpenses.  The overall decrease inSG&A expenses was offset by an increase of $1.0 million in legal,consulting and other expenses related to the FTC’s regulatory review of ourplanned acquisition of three refined petroleum terminal facilities in Newburgh,New York from Warex Terminals Corporation (see Note 16 of Notes toConsolidated Financial Statements).

 

*Operating Expenses*

* *

*Operating expenses increased by$0.2 million, or 2%, to $8.7 million for the three months ended March 31,2010 compared to $8.5 million for the three months ended March 31,2009.  The increase was primarily due to$0.3 million in expenses related to our leased storage facility in OysterBay (Commander) New York and $0.1 million in other operating expenses,offset by a decrease $0.2 million in operating expenses at our Albany, NewYork terminal.*

 

 

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*** ***

***Interest Expense***

*** ***

Interestexpense for the three months ended March 31, 2010 increased by$0.3 million, or 8%, to $4.1 million compared to $3.8 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, as well as carrying more distillate barrels of inventory duringthe first quarter of 2010 compared to the first quarter of 2009.  The increase in interest expense was offsetby a decrease in the average interest rate for the first three months of 2010compared to the same period in 2009.

 

**Liquidity and CapitalResources**

** **

***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 $85.6 million to $380.8 millionat March 31, 2010 compared to $295.2 million at December 31,2009 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 April 21, 2010, the board ofdirectors of our general partner declared a quarterly cash distribution of $0.4875 perunit for the period from January 1, 2010 through March 31, 2010($1.95 per unit on an annualized basis) to our common and subordinatedunitholders of record as of the close of business May 5, 2010.  We expect to pay the cash distribution of approximately$8.5 million on May 14, 2010.

 

OnMarch 19, 2010, we completed our public offering of 3,910,000 common unitsrepresenting limited partner interests at a price of $22.75 per common unit,which included a 510,000 common unit purchase option exercised by theunderwriters.  Net proceeds wereapproximately $84.8 million,after deducting approximately $4.2 million in underwriting fees and offering expenses.  We used the net proceeds to reduceindebtedness under our credit agreement. See Note 14of Notes to Consolidated Financial Statements for additional informationrelated to the public offering.

 

***CapitalExpenditures***

*** ***

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 $0.5 million and $0.9 million in maintenance capitalexpenditures for the three months ended March 31, 2010 and 2009,respectively, which are included in capital expenditures in the accompanyingconsolidated statements of cash flows. Repair and maintenance expenses associated with existing assets that areminor in nature and do not extend the useful life of existing assets arecharged to operating expenses as incurred.

 

Expansioncapital expenditures include expenditures to acquire assets to grow ourbusiness 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 credit our agreement or byissuing additional equity.  We hadapproximately $1.4 million and $1.6 million in expansion capitalexpenditures for the three months ended March 31, 2010 and 2009,respectively.  Specifically, for thethree months ended March 31, 2010, expansion capital expendituresconsisted of approximately $1.1 million in costs related to our terminaland rail expansion project in Albany, New York and $0.3 million inbio-fuel conversion costs at our Chelsea, Massachusetts terminal.  The $1.1 million in costs in Albanyinclude a continuing program to bring previously out-of-permit tanks backonline, the installation of a marine vapor recovery system to allow for loadingand offloading of gasoline and ethanol and the conversion of two distillatestorage tanks to gasoline. Comparatively, for the three months ended March 31, 2009, expansioncapital expenditures included approximately $1.0 million at the Albany,New York terminal in costs related to bringing formerly out-of-permit tanksback online and to dock expansion and $0.6 million in additional terminalequipment at the Providence, Rhode Island terminal.

 

 

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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..

 

***CashFlow***

*** ***

Thefollowing table summarizes cash flow activity (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **March 31,**     | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net cash provided by operating activities |       | $                      | 45,494     |   | $ | 111,230 |   |
| Net cash used in investing activities     |       | $                      | (1,914     | ) | $ | (2,452 | ) |
| Net cash used in financing activities     |       | $                      | (43,492    | ) | $ | (106,734 | ) |

 

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

 

Netcash provided by operating activities was $45.5 million for the threemonths ended March 31, 2010 compared to $111.2 million for the sameperiod in 2009, for a quarter-over-quarter decrease in cash from operatingactivities of $65.7 million.  Thedecrease was primarily due to the quarter-over-quarter change in the fair valueof forward fixed price contracts of approximately $120.1 million and the$3.8 million decrease in net income. Specifically, the contracts supporting our forward fixed price hedgeprogram required margin payments of $11.4 million to the NYMEX due to market direction in the threemonths ended March 31, 2010, while for the three months ended March 31, 2009, similarhedging activity provided funds from the NYMEX of $108.7 million. Despite the quarter-over-quarter increase in refined petroleum productprices, the overall decrease in cash provided by operating activities wasoffset by the seasonal change in the carrying values of accounts receivablesand inventories.  Such carrying valuesprovided a combined $90.0 million in funds for the three months ended March 31,2010 compared to $33.0 million for the three months ended March 31,2009, an increase of $57.0 million.

 

Netcash used in investing activities was $1.9 million for the three monthsended March 31, 2010 compared to $2.5 million for the same period in2009, and included $0.5 million in maintenance capital expenditures and$1.4 million in expansion capital expenditures ($1.1 million in costsrelated to our terminal and rail expansion project in Albany, New York and$0.3 million in bio-fuel conversion costs at our Chelsea, Massachusettsterminal).  The $1.1 million incosts in Albany include 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 three months ended March 31, 2009, net cashused in investing activities included $0.9 million in maintenance capitalexpenditures and $1.6 million in expansion capital expenditures($1.0 million at the Albany, New York terminal in costs related to bringingformerly out-of-permit tanks back online and to dock expansion and$0.6 million in additional terminal equipment at the Providence, RhodeIsland terminal).

 

Netcash used in financing activities was $43.5 million for the three monthsended March 31, 2010 compared to $106.7 million for the same periodin 2009, and included net payments on our credit facilities of$121.4 million, $6.5 million in cash distributions to our common andsubordinated unitholders and our general partner and $0.4 million in repurchasedunits held for tax obligations related to units distributed under the LTIP,offset by $84.8 million in net proceeds from our recent publicoffering.  Comparatively, for the threemonths ended March 31, 2009, net cash used in financing activities included$100.2 million in net payments on our credit facilities and$6.5 million in cash distributions to our common and subordinatedunitholders and our general partner.

 

 

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***Credit Agreement***

 

We,our general partner, our operating company and our operating subsidiaries havea four-year senior secured credit agreement. Pursuant to the credit agreement, we exercised our accordion feature(discussed below) and requested an increase in the Total WC Revolver Commitment(as defined in the credit agreement) in an amount equal to$100.0 million.  On December 4,2009, certain lenders under the credit agreement agreed to fund the$100.0 million increase, bringing the total available commitments underthe credit agreement from $750.0 million to $850.0 million.  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 April 22, 2011.

 

Thereare three facilities under our credit agreement:

 

·                  aworking capital revolving credit facility to be used for working capitalpurposes and letters of credit in the principal amount equal to the lesser ofour borrowing base and $750.0 million; the $750.0 million includes two$50.0 million seasonal overline facilities that are available each yearonly during the period between September 1 and June 30;

 

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

 

·                  a$15.0 million revolving credit facility to be used for general purposes.

 

Inaddition, the credit agreement has an accordion feature whereby we may requeston the same terms and conditions of our then existing credit agreement,provided no Event of Default (as defined in the credit agreement) then exists,an increase to:  (1) the acquisitionfacility by up to another $50.0 million, for a total acquisition facilityof up to $135.0 million; and (2) the working capital revolving creditfacility by up to another $100.0 million, for atotal working capital revolving credit facility of up to $850.0 million.  Any such request for an increase by us mustbe in a minimum amount of $5.0 million, and no more than three suchrequests may be made for each facility. We, however, cannot provide assurance that our lending group will agreeto fund any request by us for additional amounts in excess of the totalavailable commitments of $850.0** **million.

 

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, we can borrow only up to the level of our then currentborrowing base.  Availability under ourborrowing base may be affected by events beyond our control, such as changes inrefined petroleum product prices, collection cycles, counterparty performance,advance rates and limits and general economic conditions.  These and other events could require us toseek waivers or amendments of covenants or alternative sources of financing orto reduce expenditures.  We can provideno assurance that such waivers, amendments or alternative financing could beobtained, or, if obtained, would be on terms acceptable to us.

 

Borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio (as defined in the credit agreement). Borrowings under the acquisition and revolving credit facilities bearinterest at (1) the Eurodollar rate plus 2.25% to 2.75%, (2) the costof funds rate plus 1.75% to 2.25%, or (3) the base rate plus 0.75% to1.25%, each depending on the pricing level provided in the credit agreement,which in turn depends upon the Combined Interest Coverage Ratio.  The average interest ratesfor the credit agreement were 3.3% and 3.9% for the three months ended March 31,2010 and 2009, respectively.

 

Weincur a letter of credit fee of 1.75% per annum for each letter of creditissued.  In addition, we incur acommitment fee on the unused portion of the three facilities under the creditagreement (including the unused portion of either of the seasonal overlinefacilities exercised by us) equal to 0.3% to 0.375% per annum, depending on thepricing level and the Combined Interest Coverage Ratio provided in the creditagreement.  We also incur a facility feeof 0.1% per annum on any unexercised seasonal overline facility during theperiod between September 1 and June 30 and a seasonal overline fee of$30,000 each time we elect to exercise either of the seasonal overlinefacilities.

 

 

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Asof March 31, 2010, we had total borrowings outstanding under our creditagreement of $412.4 million, including $71.2 million outstanding onour acquisition facility.  In addition,we had outstanding letters of credit of $32.8 million.  The total remaining availability forborrowings and letters of credit at March 31, 2010 and December 31,2009 was $404.8 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 ratio, a minimum combined interest coverage ratio and a maximum leverageratio.  On January 26, 2010, thelenders under the credit agreement consented to increase our capitalexpenditures limit for the fiscal year ending December 31, 2010 from$10.0 million to $20.0 million. We were in compliance with the foregoing covenants at March 31,2010.  The credit agreement also containsa representation whereby there can be no event or circumstance, eitherindividually or in the aggregate, that has had or could reasonably be expectedto have a Material Adverse Effect (as defined in the credit agreement).

 

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

 

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

 

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

 

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

 

***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.

 

Borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio (as defined in the credit agreement). Borrowings under the acquisition and revolving credit facilities bearinterest at (1) the Eurodollar rate plus 2.25% to 2.75%, (2) the costof funds rate plus 1.75% to 2.25%, or (3) the base rate plus 0.75% to1.25%, each depending on the pricing level provided in the credit agreement,which in turn depends upon the Combined Interest Coverage Ratio.  The average interest ratesfor the credit agreement were approximately 3.3% and 3.9% for the three monthsended March 31, 2010 and 2009, respectively.

 

Asof March 31, 2010, we had total borrowings outstanding under the creditagreement of $412.4 million.  Theimpact of a 1% increase in the interest rate on this amount of debt would haveresulted in an increase in interest expense, and a corresponding decrease inour results of operations, of approximately $4.1 million annually,assuming, however, that our indebtedness remained constant throughout the 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 in thethree-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 current three-monthLIBOR rate on the $100.0 millionof three-month LIBOR-based borrowings. Conversely, whenever the three-month LIBOR rate is lower than the floor,we remit to the respective financial institution the difference between thefloor and the current three-month LIBOR rate on the $100.0 million of three-month LIBOR-based borrowings.  As of March 31, 2010, the three-monthLIBOR rate of 0.25% was lower than the floor rate.  As a result, in April 2010, we remittedto the respective financial institution the difference between the floor rateand the current rate which amounted to approximately $428,000.

 

On September 29, 2008,we executed our second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthlyinterest payments made on our $100.0 million one-month LIBOR-based borrowings (and subsequentrefinancings thereof) due to changes in the one-month LIBOR rate.  Under the second collar, we capped ourexposure at a maximum one-month LIBOR rate of 5.50% and established a minimumfloor rate of 2.70%.  Whenever theone-month LIBOR rate is greater than the cap, we receive from the respectivefinancial institution the difference between the cap and the current one-monthLIBOR rate on the $100.0 millionof one-month LIBOR-based borrowings. Conversely, whenever the one-month LIBOR rate is lower than the floor,we remit to the respective financial institution the difference between thefloor and the current one-month LIBOR rate on the $100.0 million of one-month LIBOR-based borrowings.  As of March 31, 2010, theone-month LIBOR rate of 0.23% was lower than the floor rate.  As a result, in April 2010, we remittedto the respective financial institution the difference between the floor rateand the current rate which amounted to approximately $206,000.

 

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 ininterest payments due to changes in the one-month LIBOR swap curve with respectto $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.

 

 

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***Commodity Risk***

 

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

 

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

 

AtMarch 31, 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  March 31, 2010** | ** ** | **Effect  of 10%****Price Increase** | ** ** | **Effect  of 10%****Price Decrease** | ** ** |
| NYMEX contracts                |       | $                                       | (22,225    | )                                    | $          | (38,179 | ) | $ | 38,179 |   |
| Swaps, options and other,  net |       | 746                                     |       | (4,634                               | )          | 1,498 |   |
|                           |       | $                                       | (21,479    | )                                    | $          | (42,813 | ) | $ | 39,677 |   |

 

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 March 31,2010.  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$10.3 million at March 31, 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 

 

 

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utilized,are traded on regulated exchanges, greatly reducing potential creditrisks.  Exposure on swap and certainoption agreements is limited to the amount of the recorded fair value as of thebalance sheet dates.  We utilizeprimarily one clearing broker, a major financial institution, for all NYMEXderivative transactions and the right of offset exists.  Accordingly, the fair value of all derivativeinstruments is displayed on a net basis.

 

**Item 4.        Controls and Procedures**

 

***DisclosureControls and Procedures***

 

Wemaintain disclosure controls and procedures that are designed to ensure thatthe information required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms and that information is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.  Under the supervision and with theparticipation of our principal executive officer and principal financialofficer, management evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) or 15d-15(e) of theExchange Act).  Based on that evaluation,our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures were effective as of March 31,2010.

 

***Internal Control over Financial Reporting***

 

There has not been any change in our internal control over financialreporting that occurred during the quarter ended March 31, 2010 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over 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 11 in this Quarterly Report on Form 10-Q,we are not aware of any significant legal or governmental proceedings againstus, or contemplated to be brought against us. We maintain insurance policies with insurers in amounts and withcoverage and deductibles as our general partner believes are reasonable andprudent.  However, we can provide noassurance that this insurance will be adequate to protect us from all materialexpenses related to potential future claims or that these levels of insurancewill be available in the future at economically acceptable prices.

 

***Other***

 

On October 22, 2009,the Federal Trade Commission (“FTC”) issued a Civil Investigative Demand and aSubpoena Duces Tecum in connection with the FTC’s regulatory review of ourplanned acquisition of three refined petroleum terminal facilities in Newburgh,New York from Warex Terminals Corporation. In April 2010, the FTC closed its regulatoryreview and determined that no further action is warranted by the FTC.  We currently expect to close the transactionby the third quarter of 2010.

 

Certain of our employeesat our terminal in Oyster Bay (Commander), New York were employed under acollective bargaining agreement that expired in April 2010.  On February 25, 2010, we received apetition filed with the National Labor Relations Board (“NLRB”) by the unionrepresenting certain employees assigned to Glenwood Landing and Inwood, NewYork (“Local 419”) seeking to replace the incumbent union at our OysterBay, New York terminal (“Local 355”) with respect to certain hourlyemployees.  On March 1, 2010,Local 355 filed a disclaimer of representation with the NLRB with respectto the Oyster Bay hourly employees.  Arepresentation election was held in April 2010 pursuant to the terms of aStipulated Election Agreement with Local 419 with respect to theseemployees.  Local 419 was elected asthe representative of these employees, and we will negotiate a new collectivebargaining agreement with Local 419. We do not believe the results of these negotiations will have a materialadverse effect on our operations.

 

**Item 1A.     Risk Factors**

 

Inaddition to other information set forth in this report, you should carefullyconsider the factors discussed in Part I, Item 1A, “Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2009,which could materially affect our business, financial condition or futureresults.

 

 

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

 

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

 

 

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**SIGNATURES**

 

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

 

 
|                           | **GLOBAL PARTNERS LP** |
|--------------------------------|------------------------|
|                           | By:                    | Global GP LLC, |
|                           |                   | its general partner |
|                           |                   |   |
|                           |                   |   |
| Dated:   May 7, 2010 |                   | By: | /s/ Eric Slifka |   |
|                           |                   |   | Eric Slifka |
|                           |                   |   | President and Chief Executive Officer |
|                           |                   |   | (Principal Executive Officer) |
|                           |                   |   |
|                           |                   |   |
| Dated:   May 7, 2010 |                   | By: | /s/ Thomas J. Hollister |   |
|                           |                   |   | Thomas J. Hollister |
|                           |                   |   | Chief Operating Officer and Chief Financial  Officer |
|                           |                   |   | (Principal Financial Officer) |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description** |
|---------------------|------------|-----------------|
|                |       |            |
| 3.1                 |       | —          | 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). |
|                |       |            |   |
| 31.1                |       | —          | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer of  Global GP LLC, general partner of Global Partners LP. |
|                |       |            |   |
| 31.2                |       | —          | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of  Global GP LLC, general partner of Global Partners LP. |
|                |       |            |   |
| 32.1                | †     | —          | Section 1350  Certification of Chief Executive Officer of Global GP LLC, general partner of Global Partners  LP. |
|                |       |            |   |
| 32.2                | †     | —          | Section 1350  Certification of Chief Financial Officer of Global GP LLC, general partner of Global Partners  LP. |

 

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

 

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