**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 
| **ý**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  | ** ** |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** **                                                                                              | ** ** |
| **For the  quarterly period ended September 30, 2009** |
| ** **                                                  | ** **                                                                                              |
| **OR**                                                      |
| ** **                                                  | ** **                                                                                              | ** ** |
| **o**                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |

** **

**For the transition periodfrom              to              **

 

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

 

**Global Partners LP**

(Exactname of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The issuer had 7,428,139 common units and 5,642,424subordinated units outstanding as of November 3, 2009.

 

 

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**TABLE OF CONTENTS**

 
| **PART I.      FINANCIAL  INFORMATION**                                                           | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** |
| **Item 1.     Financial  Statements**                                                                       | 1          |
| ** **                                                                                                                           |       |
| Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                                                | 1          |
|                                                                                                                                 |       |
| Consolidated  Statements of Income for the three and nine months ended September 30,  2009 and 2008                             | 2          |
|                                                                                                                                 |       |
| Consolidated Statements of Cash Flows for the nine  months ended September 30, 2009 and 2008                                    | 3          |
|                                                                                                                                 |       |
| Consolidated  Statements of Partners’ Equity for the nine months ended September 30,  2009                                 | 4          |
|                                                                                                                                 |       |
| Notes to  Consolidated Financial Statements                                                                                          | 5          |
|                                                                                                                                 |       |
| **Item 2.     Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 30         |
| ** **                                                                                                                           |       |
| **Item 3.     Quantitative and  Qualitative Disclosures about Market Risk**                                 | 45         |
| ** **                                                                                                                           |       |
| **Item 4.     Controls and  Procedures**                                                                    | 47         |
| ** **                                                                                                                           |       |
| **PART II.    OTHER INFORMATION**                                                                                     | 48         |
| ** **                                                                                                                           |       |
| **Item  1.     Legal Proceedings**                                                                          | 48         |
| ** **                                                                                                                           |       |
| **Item  1A.  Risk Factors**                                                                                                | 48         |
| ** **                                                                                                                           |       |
| **Item 2.     Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 48         |
| ** **                                                                                                                           |       |
| **Item 6.     Exhibits**                                                                                    | 49         |
| ** **                                                                                                                           |       |
| **SIGNATURES**                                                                                                                       | 50         |
| ** **                                                                                                                           |       |
| **INDEX TO  EXHIBITS**                                                                                                               | 51         |

 

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**Item 1.   FinancialStatements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

** **
| ** **                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                         |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                               |       | $                      | 684        |                  | $          | 945 |   |
| Accounts receivable, net                                                                                                                                                |       | 195,544                |       | 249,418               |       |
| Accounts receivable—affiliates                                                                                                                                     |       | 4,721                  |       | 2,518                 |       |
| Inventories                                                                                                                                                             |       | 420,301                |       | 240,346               |       |
| Brokerage margin deposits                                                                                                                                               |       | 5                      |       | 8,991                 |       |
| Fair value of forward fixed price contracts                                                                                                                             |       | 4,063                  |       | 161,787               |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 35,733                 |       | 29,302                |       |
| Total current assets                                                                                                                                                    |       | 661,051                |       | 693,307               |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                             |       | 161,208                |       | 161,988               |       |
| Intangible assets, net                                                                                                                                                  |       | 29,193                 |       | 31,403                |       |
| Other assets                                                                                                                                                            |       | 2,800                  |       | 2,564                 |       |
| Total assets                                                                                                                                                            |       | $                      | 854,252    |                  | $          | 889,262 |   |
| ** **                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Liabilities and partners’  equity**                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                    |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                        |       | $                      | 165,745    |                  | $          | 219,783 |   |
| Working capital revolving credit facility—current  portion                                                                                                         |       | 113,497                |       | 208,210               |       |
| Environmental liabilities—current portion                                                                                                                          |       | 3,296                  |       | 4,191                 |       |
| Accrued expenses and other current liabilities                                                                                                                          |       | 65,303                 |       | 54,054                |       |
| Income taxes payable                                                                                                                                                    |       | 48                     |       | 520                   |       |
| Obligations on forward fixed price contracts                                                                                                                            |       | 12,254                 |       | 7,954                 |       |
| Total current liabilities                                                                                                                                               |       | 360,143                |       | 494,712               |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Working capital revolving credit facility—less  current portion                                                                                                    |       | 254,203                |       | 154,090               |       |
| Acquisition facility                                                                                                                                                    |       | 71,200                 |       | 71,200                |       |
| Environmental liabilities—less current portion                                                                                                                     |       | 2,280                  |       | 2,377                 |       |
| Accrued pension benefit cost                                                                                                                                            |       | 7,440                  |       | 8,853                 |       |
| Deferred compensation                                                                                                                                                   |       | 1,796                  |       | 1,663                 |       |
| Other long-term liabilities                                                                                                                                             |       | 9,871                  |       | 12,899                |       |
| Total liabilities                                                                                                                                                       |       | 706,933                |       | 745,794               |       |
| ** **                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Partners’ equity**                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| Common unitholders (7,428,139 units issued and  7,322,659 outstanding at September 30, 2009 and 7,428,139 units issued  and outstanding at December 31, 2008) |       | 162,075                |       | 163,092               |       |
| Subordinated unitholders (5,642,424 units issued  and outstanding at September 30, 2009 and December 31, 2008)                                                |       | (3,152                 | )          | (4,189                | )          |
| General partner interest (1.73% interest with  230,303 equivalent units outstanding at September 30, 2009 and  December 31, 2008)                             |       | (129                   | )          | (172                  | )          |
| Accumulated other comprehensive loss                                                                                                                                    |       | (11,475                | )          | (15,263               | )          |
| Total partners’ equity                                                                                                                                             |       | 147,319                |       | 143,468               |       |
| Total liabilities and partners’ equity                                                                                                                             |       | $                      | 854,252    |                  | $          | 889,262 |   |

 

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

 

1

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF INCOME**

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

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Sales                                                                                          |       | $                                          | 1,285,331  |                                      | $          | 2,272,079 |   | $ | 4,119,435 |   | $ | 7,290,780 |   |
| Cost of sales                                                                                  |       | 1,256,058                                  |       | 2,246,151                                 |       | 4,011,659 |   | 7,206,563 |   |
| Gross profit                                                                                   |       | 29,273                                     |       | 25,928                                    |       | 107,776 |   | 84,217 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Costs and operating  expenses:                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Selling, general and  administrative expenses                                                  |       | 13,859                                     |       | 10,457                                    |       | 45,233 |   | 31,712 |   |
| Operating expenses                                                                             |       | 8,666                                      |       | 8,429                                     |       | 26,278 |   | 26,225 |   |
| Amortization expenses                                                                          |       | 747                                        |       | 738                                       |       | 2,350 |   | 2,199 |   |
| Total costs and operating  expenses                                                            |       | 23,272                                     |       | 19,624                                    |       | 73,861 |   | 60,136 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Operating income                                                                               |       | 6,001                                      |       | 6,304                                     |       | 33,915 |   | 24,081 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense                                                                               |       | (3,742                                     | )          | (5,297                                    | )          | (10,940 | ) | (15,414 | ) |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Income  before income tax expense                                                              |       | 2,259                                      |       | 1,007                                     |       | 22,975 |   | 8,667 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Income  tax expense                                                                            |       | (200                                       | )          | —                                    |       | (1,075 | ) | (295 | ) |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                                     |       | 2,059                                      |       | 1,007                                     |       | 21,900 |   | 8,372 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Less: General partner’s interest  in net income,  including incentive distribution rights |       | (86                                        | )          | (67                                       | )          | (529 | ) | (294 | ) |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Limited partners’ interest  in net income                                                 |       | $                                          | 1,973      |                                      | $          | 940 |   | $ | 21,371 |   | $ | 8,078 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Basic net income per  limited partner unit                                                     |       | $                                          | 0.15       |                                      | $          | 0.07 |   | $ | 1.64 |   | $ | 0.62 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Diluted net income per  limited partner unit                                                   |       | $                                          | 0.15       |                                      | $          | 0.07 |   | $ | 1.60 |   | $ | 0.62 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Basic weighted average  limited partner units outstanding                                      |       | 12,979                                     |       | 13,071                                    |       | 13,037 |   | 13,071 |   |
|                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Diluted weighted average  limited partner units outstanding                                    |       | 13,304                                     |       | 13,071                                    |       | 13,334 |   | 13,071 |   |

 

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

 

2

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| **Cash flows from operating  activities**                                          |       |                                      |       |   |   |
| Net income                                                                         |       | $                                         | 21,900     |   | $ | 8,372 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation and  amortization                                                     |       | 11,149                                    |       | 10,584 |   |
| Amortization of deferred  financing fees                                           |       | 868                                       |       | 657 |   |
| Loss on disposition of  property and equipment and other                           |       | 1                                         |       | 6 |   |
| Bad debt expense                                                                   |       | 1,520                                     |       | 90 |   |
| Stock-based compensation  expense                                                  |       | 1,580                                     |       | 555 |   |
| Changes in operating  assets and liabilities:                                      |       |                                      |       |   |   |
| Accounts receivable                                                                |       | 52,354                                    |       | 89,643 |   |
| Accounts receivable –  affiliate                                              |       | (2,203                                    | )          | 1,540 |   |
| Inventories                                                                        |       | (179,955                                  | )          | 125,008 |   |
| Broker margin deposits                                                             |       | 8,986                                     |       | 7,148 |   |
| Prepaid expenses, all  other current assets and other assets                       |       | (7,673                                    | )          | (6,095 | ) |
| Accounts payable                                                                   |       | (54,037                                   | )          | (78,470 | ) |
| Income taxes payable                                                               |       | (471                                      | )          | 109 |   |
| Change in fair value of forward fixed price  contracts                             |       | 162,024                                   |       | (86,568 | ) |
| Accrued expenses and all  other current liabilities                                |       | 9,735                                     |       | (18,455 | ) |
| Net cash provided by  operating activities                                         |       | 25,778                                    |       | 54,124 |   |
|                                                                               |       |                                      |       |   |   |
| **Cash flows from investing  activities**                                          |       |                                      |       |   |   |
| Capital expenditures                                                               |       | (8,024                                    | )          | (8,301 | ) |
| Proceeds from sale of  property and equipment                                      |       | 2                                         |       | 13 |   |
| Net cash used in investing  activities                                             |       | (8,022                                    | )          | (8,288 | ) |
|                                                                               |       |                                      |       |   |   |
| **Cash flows from financing  activities**                                          |       |                                      |       |   |   |
| Proceeds from (payments  on) credit facilities, net                                |       | 5,400                                     |       | (26,500 | ) |
| Payments on note payable,  other                                                   |       | —                                    |       | (1,239 | ) |
| Repurchase of common units                                                         |       | (3,464                                    | )          | — |   |
| Repurchased units withheld  for tax obligations                                    |       | (386                                      | )          | — |   |
| Distributions to partners                                                          |       | (19,567                                   | )          | (19,602 | ) |
| Net cash used in financing  activities                                             |       | (18,017                                   | )          | (47,341 | ) |
|                                                                               |       |                                      |       |   |   |
| Decrease in cash and cash  equivalents                                             |       | (261                                      | )          | (1,505 | ) |
| Cash and cash equivalents  at beginning of period                                  |       | 945                                       |       | 2,110 |   |
| Cash and cash equivalents  at end of period                                        |       | $                                         | 684        |   | $ | 605 |   |
|                                                                               |       |                                      |       |   |   |
| **Supplemental information**                                                       |       |                                      |       |   |   |
| Cash paid during the  period for interest                                          |       | $                                         | 10,997     |   | $ | 15,414 |   |

* *

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

 

3

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**GLOBALPARTNERS LP**

**CONSOLIDATED STATEMENTS OFPARTNERS’ EQUITY**

**(In thousands)**

**(Unaudited)**

 
| ** **                                     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                     | ** ** | ** **      | ** ** | ** **       | ** ** | **General**  | ** ** | **Other**         | ** ** | **Total**          | ** ** |
| ** **                                     | ** ** | **Common**      | ** ** | **Subordinated** | ** ** | **Partner**  | ** ** | **Comprehensive** | ** ** | **Partners’** | ** ** |
| ** **                                     | ** ** | **Unitholders** | ** ** | **Unitholders**  | ** ** | **Interest** | ** ** | **Loss**          | ** ** | **Equity**         | ** ** |
| ** **                                     |       |            |       |             |       |         |       |              |       |               |       |
| **Balance at December 31, 2008**          |       | $               | 163,092    |             | $          | (4,189       | )          | $                 | (172       | )                  | $          | (15,263 | ) | $ | 143,468 |   |
| Stock-based compensation                       |       | 1,580           |       | —           |       | —       |       | —            |       | 1,580              |       |
| Repurchase of common units                     |       | (3,464          | )          | —           |       | —       |       | —            |       | (3,464             | )          |
| Repurchased units withheld for tax obligations |       | (386            | )          | —           |       | —       |       | —            |       | (386               | )          |
| Distributions to partners                      |       | (10,828         | )          | (8,253           | )          | (486         | )          | —            |       | (19,567            | )          |
| Comprehensive income:                          |       |            |       |             |       |         |       |              |       |               |       |
| Net income                                     |       | 12,081          |       | 9,290            |       | 529          |       | —            |       | 21,900             |       |
| Other comprehensive income:                    |       |            |       |             |       |         |       |              |       |               |       |
| Change in fair value of interest rate collars  |       | —          |       | —           |       | —       |       | 2,741             |       | 2,741              |       |
| Change in pension liability                    |       | —          |       | —           |       | —       |       | 1,047             |       |               | 1,047      |   |
| Total comprehensive income                     |       | —          |       | —           |       | —       |       | —            |       | 25,688             |       |
| **Balance at September 30, 2009**         |       | $               | 162,075    |             | $          | (3,152       | )          | $                 | (129       | )                  | $          | (11,475 | ) | $ | 147,319 |   |
|                                                |            |                 |            |                  |            |              |            |                   |            |                    |            |  |  |  |  |  |  |

 

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

* *

*4*

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** **

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1.**                     Organization and Basis ofPresentation

** **

**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 recently formed to expand the Partnership’s naturalgas operations.  It is in the process ofobtaining licensure and is not yet operational. In addition, GLP** **FinanceCorp. (“GLP** **Finance”) is a wholly ownedsubsidiary of the Partnership.  GLP** **Finance has no material assets or liabilities.  Its activities will be limited to co-issuingdebt securities and engaging in other activities incidental thereto.

 

ThePartnership’s 1.73% general partner interest is held by Global** **GP** **LLC, thePartnership’s general partner (the “General Partner”).  The General Partner, which is owned byaffiliates of the Slifka family, manages the Partnership’s operations andactivities and employs its officers and substantially all of its personnel.  The General Partner and affiliates of theGeneral Partner, including its directors and executive officers, own 229,683common units and 5,642,424 subordinated units, representing a combined 44.1%limited partner interest.

 

**Basis of Presentation**

** **

***InterimFinancial Statements***

** **

**The accompanyingconsolidated financial statements as of September 30, 2009 and December 31, 2008 and for the three and ninemonths ended September 30, 2009and 2008 reflect the accounts of the Partnership.  All intercompany balances and transactionshave been eliminated.**

** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) andreflect all adjustments (consisting of normal recurring adjustments) which are,in the opinion of management, necessary for a fair presentation of thefinancial condition and operating results for the interim periods.  The interim financial information, which hasbeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), should be read in conjunction with theconsolidated financial statements for the year ended December 31, 2008 andnotes thereto contained in the Partnership’s Annual Report on Form 10-K.  The results of operations for the three andnine months ended September 30, 2009 are not necessarily indicative of theresults of operations that will be realized for the entire year ending December 31,2009.

 

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

 

5

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 1.**                     Organization and Basis ofPresentation (continued)

** **

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

 
|               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|               |   | **2009**                                   |   | **2008**                                  |   | **2009**** ** |   |   | **2008**** ** |   |   |
| Distillate sales   |   | 27                                         | %      |                                      | 31     | % |   | 44% |   |   | 44% |   |   |
| Gasoline sales     |   | 68                                         | %      |                                      | 65     | % |   | 51% |   |   | 52% |   |   |
| Residual oil sales |   | 5                                          | %      |                                      | 4      | % |   | 5% |   |   | 4% |   |   |
|               |   | 100                                        | %      |                                      | 100    | % |   | 100% |   |   | 100% |   |   |

** **

ThePartnership had one customer, ExxonMobil Oil Corporation (“ExxonMobil”), whoaccounted for approximately 27% and 24% of total sales for the three monthsended September 30,****2009and 2008, respectively and approximately 22% and 21% of total sales for thenine months ended September 30,****2009and 2008, respectively.

 

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

 

**Reclassifications**

** **

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

 

**Note 2.**                     Net Income Per LimitedPartner Unit

** **

OnJanuary 1, 2009, the Partnership adopted guidance issued by the FinancialAccounting Standards Board (“FASB”) to the calculation of earnings per share (in the Partnership’s case, net income perlimited partner unit).  This guidance specifies thetreatment of earnings per unit calculations when incentive distributions rights(“IDRs”) exist in master limited partnerships. This guidance further provides that net income for the current period is to be reduced by theamount of available cash that will be distributed with respect to that periodfor purposes of calculating net income per unit.  Any residual amount representingundistributed net income (or losses) is assumed to be allocated to theownership interests in accordance with the contractual provisions of thepartnership agreement.

 

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

 

OnApril 22, 2009, the board of directors of the General Partner declared aquarterly cash distribution of $0.4875 per unit for the period from January 1,2009 through March 31, 2009.  On July 23,2009, the board declared a quarterly cash distribution of $0.4875 per unit forthe period from April 1, 2009 through June 30, 2009.  On October 21, 2009, the board declareda quarterly cash distribution of $0.4875 per unit for the period from July 1,2009 through September 30, 2009. These declared cash distributions resulted in incentive distributions tothe General Partner, as the holder of the incentive distribution rights, asindicated above, and enabled the Partnership to reach its second targetdistribution with respect to such incentive distribution rights.  See Note 9, “Cash Distributions” forfurther information.

 

6

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 2.**                     Net Income Per LimitedPartner 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 and nine months ended September 30,2009 (in thousands, except per unit data):

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

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

 

At September 30,2009, limited partner units outstanding excluded common units held on behalf ofthe Partnership pursuant to its Repurchase Program and for future satisfactionof the General Partner’s Obligations (as defined in Note 12).  These units are not deemed outstanding for purposesof calculating net income per limited partner unit (basic and diluted).

 

The Partnership appliedthe guidance issued by the FASB on a retroactive basis which had an immaterial impacton the limited partners’ interest in net income and net income per limitedpartner unit for the three and nine months ended September 30, 2008.

 

7

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 2.**                     Net Income Per LimitedPartner 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 and nine months ended September 30,2008 (in thousands, except per unit data):

 
| ** **                                                 | ** ** | **Three  months ended September 30, 2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                      | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                                      | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| **Numerator:**                                             | ** ** | **Total**                                       | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| Net income                                                 |       | $                                               | 1,007      |   | $ | 940 |   | $ | 67 |   | $ | — |   |
|                                                       |       |                                            |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                               | 6,534      |   | $ | 6,372 |   | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income             |       | (5,527                                          | )          | (5,432 | ) | (95 | ) | — |   |
| Assumed allocation of net income                           |       | $                                               | 1,007      |   | $ | 940 |   | $ | 17 |   | $ | 50 |   |
|                                                       |       |                                            |       |   |   |   |   |   |   |
| **Denominator:**                                           |       |                                            |       |   |   |   |   |   |   |
| Basic weighted average limited partner units outstanding   |       |                                            |       | 13,071 |   |   |   |   |   |
| Diluted weighted average limited partner units outstanding |       |                                            |       | 13,071 |   |   |   |   |   |
|                                                       |       |                                            |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                  |       |                                            |       | $ | 0.07 |   |   |   |   |   |
| Diluted net income per limited partner unit                |       |                                            |       | $ | 0.07 |   |   |   |   |   |

 
| ** **                                                 | ** ** | **Nine  months ended September 30, 2008** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                     | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                                     | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| **Numerator:**                                             | ** ** | **Total**                                      | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| Net income                                                 |       | $                                              | 8,372      |   | $ | 8,078 |   | $ | 294 |   | $ | — |   |
|                                                       |       |                                           |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                              | 19,602     |   | $ | 19,116 |   | $ | 336 |   | $ | 150 |   |
| Assumed allocation of undistributed net income             |       | (11,230                                        | )          | (11,038 | ) | (192 | ) | — |   |
| Assumed allocation of net income                           |       | $                                              | 8,372      |   | $ | 8,078 |   | $ | 144 |   | $ | 150 |   |
|                                                       |       |                                           |       |   |   |   |   |   |   |
| **Denominator:**                                           |       |                                           |       |   |   |   |   |   |   |
| Basic weighted average limited partner units outstanding   |       |                                           |       | 13,071 |   |   |   |   |   |
| Diluted weighted average limited partner units outstanding |       |                                           |       | 13,071 |   |   |   |   |   |
|                                                       |       |                                           |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                  |       |                                           |       | $ | 0.62 |   |   |   |   |   |
| Diluted net income per limited partner unit                |       |                                           |       | $ | 0.62 |   |   |   |   |   |

 

8

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 3.**                     Comprehensive Income

** **

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

 
|                                          |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-----------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                          |   | **September 30,**  |   | **September 30,** |   |
|                                          |   | **2009**                |   | **2008**               |   | **2009** |   | **2008** |   |
| Net income                                    |   | $                       | 2,059  |                   | $      | 1,007 |   | $ | 21,900 |   | $ | 8,372 |   |
| Change in fair value of interest rate collars |   | (674                    | )      | (251                   | )      | 2,741 |   | (367 | ) |
| Change in pension liability                   |   | 696                     |   | (756                   | )      | 1,047 |   | (1,537 | ) |
| Total comprehensive income                    |   | $                       | 2,081  |                   | $      | — |   | $ | 25,688 |   | $ | 6,468 |   |

 

**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, or market.  Prior to sale, hedges are removed fromspecific barrels of inventory, and the then unhedged inventory is sold andaccounted for on a first-in, first-out basis.

 

Inventoriesconsisted of the following (in thousands):

 
| ** **                                          | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Distillates: home heating  oil, diesel and kerosene |       | $                            | 327,982    |                        | $          | 160,000 |   |
| Residual oil                                        |       | 19,652                       |       | 24,878                      |       |
| Gasoline                                            |       | 56,055                       |       | 40,183                      |       |
| Blend stock                                         |       | 16,612                       |       | 15,285                      |       |
| Total                                               |       | $                            | 420,301    |                        | $          | 240,346 |   |

 

Inaddition to its own inventory, the Partnership has exchange agreements withunrelated third-party suppliers, whereby it may draw inventory from these othersuppliers and suppliers may draw inventory from the Partnership.  Positive exchange balances are accounted foras accounts receivable and amounted to $14.4 million and $14.8 millionat September 30, 2009 and December 31, 2008, respectively.  Negative exchange balances are accounted foras accounts payable and amounted to $12.9 million and $8.4 million atSeptember 30, 2009 and December 31, 2008, respectively.  Exchange transactions are valued usingcurrent quoted market prices.

 

**Note 5.**                     Derivative FinancialInstruments

** **

**Accounting and reportingguidance for derivative instruments and hedging activities requires that anentity recognize derivatives as either assets or liabilities on the balancesheet and measure the instruments at fair value.  Changes in the fair value of the derivativeare to be recognized currently in earnings, unless specific hedge accountingcriteria are met.**

** **

On January 1, 2009,the Partnership adopted additional guidance issued by the FASB which requiresthe Partnership to provide enhanced disclosures about (a) howand why the Partnership uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for, and (c) howderivative instruments and related hedged items affect the Partnership’sfinancial position, financial performance and cash flows.

 

9

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

**The following tablepresents the volume of activity related to the Partnership’s derivativefinancial instruments at September 30, 2009:**

** **

| ** **            | ** ** | **Units(1)** | ** ** | **Unit of  Measure**     | ** **            |
|-----------------------|------------|--------------|------------|--------------------------|-----------------------|
| Oil Contracts         |       |         |       |                     |                  |
| Long                  |       | 12,570       |       | Thousands  of barrels    |                  |
| Short                 |       | (16,751      | )          | Thousands  of barrels    |                  |
|                  |       |         |       |                     |                  |
| Natural Gas Contracts |       |         |       |                     |                  |
| Long                  |       | 16,753       |       | Thousands  of decatherms |                  |
| Short                 |       | (16,753      | )          | Thousands  of decatherms |                  |
|                  |       |         |       |                     |                  |
| Interest Rate Collars |       | $            | 200        |                     | Thousands  of dollars |   |
|                       |            |              |            |                          |                       |  |

 

**(1)    Numberof open 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 thePartnership’s derivatives is determined through the use of independent marketsand is based upon the prevailing market prices of such instruments at the dateof valuation.  The Partnership entersinto futures contracts for the receipt or delivery of refined petroleumproducts in future periods.  Thecontracts are entered into in the normal course of business to reduce risk ofloss of inventory on hand, which could result through fluctuations in marketprices.  Changes in the fair value ofthese contracts, as well as the offsetting gain or loss on the hedged inventoryitem, are recognized in earnings as an increase or decrease in cost ofsales.  Ineffectiveness related to thesehedging activities was immaterial at September 30, 2009.**

** **

The Partnership also usesfutures contracts and swap agreements to hedge exposure under forward purchaseand sale commitments.  These agreementsare intended to hedge the cost component of virtually all of the Partnership’sforward purchase and sale commitments. Changes in the fair value of these contracts, as well as offsettinggains or losses on the forward fixed price purchase and sale commitments, arerecognized in earnings as an increase or decrease in cost of sales.  Gains and losses on net product margin fromforward fixed price purchase and sale contracts are reflected in earnings as anincrease or decrease in cost of sales as these contracts mature.  Ineffectiveness related to these hedgingactivities was immaterial at September 30, 2009.

 

10

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 5.**                     Derivative FinancialInstruments (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 September 30, 2009 and December 31,2008 (in thousands):

 
| ** **                                                            | ** ** | **Assets**         | ** ** | **Liabilities**        | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                            | ** ** | **Balance Sheet**  | ** ** | **2009**               | ** ** | **2008** | ** ** | **Balance Sheet** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives**                                                       | ** ** | **Location (Net)** | ** ** | **Fair Value**         | ** ** | **Fair Value** | ** ** | **Location (Net)** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| * *                                                              |       |               |       |                   |       |   |   |   |   |   |   |   |   |
| *Derivatives designated as  hedging instruments and firm commitments* |       |               |       |                   |       |   |   |   |   |   |   |   |   |
|                                                                  |       |               |       |                   |       |   |   |   |   |   |   |   |   |
| Oil  product contracts(1)                                             |       | (2)                |       | $                      | 34,455     |   | $ | 207,370 |   | (3) |   | $ | 43,737 |   | $ | 49,640 |   |
|                                                                  |       |               |       |                   |       |   |   |   |   |   |   |   |   |
| *Derivatives  not designated as hedging instruments*                  |       |               |       |                   |       |   |   |   |   |   |   |   |   |
|                                                                  |       |               |       |                   |       |   |   |   |   |   |   |   |   |
| Oil product and  natural gas contracts                                |       | (2)                |       | 8,262                  |       | 14,606 |   | Accrued  expenses and other current liabilities |   | 7,450 |   | 14,666 |   |
|                                                                  |       |               |       |                   |       |   |   |   |   |   |   |   |   |
| Total  derivatives                                                    |       |               |       | $                      | 42,717     |   | $ | 221,976 |   |   |   | $ | 51,187 |   | $ | 64,306 |   |

 
| (1) |   | Includes forward  fixed price purchase and sale contracts as recognized in the Partnership’s  consolidated balance sheets at September 30, 2009 and December 31,  2008. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Fair value of  forward fixed price contracts, prepaid expenses and other current assets and  accrued and other current liabilities                                                     |
| (3) |   | Obligations on  forward fixed price contracts and accrued expenses and other current  liabilities                                                                                      |

 

 

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 and ninemonths ended September 30, 2009 and 2008 (in thousands):

 
| ** **            | ** ** | ** **        | ** ** | **Amount  of Gain (Loss)** | ** ** | ** **             | ** ** | **Location of**   | ** ** | **Amount  of Gain (Loss)**                    | ** ** |
|-----------------------|------------|-------------------|------------|----------------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **Location of**   | ** ** | **Recognized  in Income**  | ** ** | **Hedged**             | ** ** | **Gain (Loss)**   | ** ** | **Recognized  in Income**                     | ** ** |
| **Derivatives  in**   | ** ** | **Gain (Loss)**   | ** ** | **on  Derivatives**        | ** ** | **Items in**           | ** ** | **Recognized in** | ** ** | **on  Hedged Items**                          | ** ** |
| **Fair  Value**       | ** ** | **Recognized in** | ** ** | **Three  Months Ended**    | ** ** | **Fair Value**         | ** ** | **Income on**     | ** ** | **Three  Months Ended**                       | ** ** |
| **Hedging**           | ** ** | **Income on**     | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **Hedge**         | ** ** | **Related**                                   | ** ** | **September 30,** | ** ** | **September30,** | ** ** |
| **Relationship**      | ** ** | **Derivative**    | ** ** | **2009**                   | ** ** | **2008**               | ** ** | **Relationships** | ** ** | **Hedged Item**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |              |       |                       |       |                   |       |              |       |                                          |       |   |   |   |   |
| Oil product contracts |       | Cost of sales     |       | $                          | (876       | )                      | $          | 96,559            |       | Inventories and forward fixed price contracts |       | Cost of sales |   | $ | 879 |   | $ | (96,945 | ) |
|                       |            |                   |            |                            |            |                        |            |                   |            |                                               |            |  |  |  |  |  |  |  |  |

 

11

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

 
| ** **            | ** ** | ** **        | ** ** | **Amount  of Gain (Loss)** | ** ** | ** **             | ** ** | **Location of**   | ** ** | **Amount  of Gain (Loss)**                    | ** ** |
|-----------------------|------------|-------------------|------------|----------------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **Location of**   | ** ** | **Recognized  in Income**  | ** ** | **Hedged**             | ** ** | **Gain (Loss)**   | ** ** | **Recognized  in Income**                     | ** ** |
| **Derivatives  in**   | ** ** | **Gain (Loss)**   | ** ** | **on  Derivatives**        | ** ** | **Items in**           | ** ** | **Recognized in** | ** ** | **on  Hedged Items**                          | ** ** |
| **Fair  Value**       | ** ** | **Recognized in** | ** ** | **Nine  Months Ended**     | ** ** | **Fair Value**         | ** ** | **Income on**     | ** ** | **Nine  Months Ended**                        | ** ** |
| **Hedging**           | ** ** | **Income on**     | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **Hedge**         | ** ** | **Related**                                   | ** ** | **September 30,** | ** ** | **September30,** | ** ** |
| **Relationship**      | ** ** | **Derivative**    | ** ** | **2009**                   | ** ** | **2008**               | ** ** | **Relationships** | ** ** | **Hedged Item**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |              |       |                       |       |                   |       |              |       |                                          |       |   |   |   |   |
| Oil product contracts |       | Cost of sales     |       | $                          | (200,478   | )                      | $          | 13,673            |       | Inventories and forward fixed price contracts |       | Cost of sales |   | $ | 201,126 |   | $ | (13,745 | ) |
|                       |            |                   |            |                            |            |                        |            |                   |            |                                               |            |  |  |  |  |  |  |  |  |

 

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):

 
| ** **             | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Futures contracts, net |       | $                            | (5,760     | )                           | $          | 138,741 |   |
| Swaps and other, net   |       | (2,431                       | )          | 15,092                      |       |
| Total                  |       | $                            | (8,191     | )                           | $          | 153,833 |   |

 

The total balances of$(8.2 million) and $153.8 million reflect the fair value of theforward fixed price contract (liability)/asset net of the correspondingasset/(liability) on the accompanying consolidated balance sheets at September 30,2009 and December 31, 2008, respectively.

 

The Partnership alsomarkets and sells natural gas.  ThePartnership generally conducts business by entering into forward purchasecommitments for natural gas only when it simultaneously enters 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 quarterlybasis.  This process includes specificidentification of the hedging instrument and the hedged transaction, the natureof the risk being hedged and how the hedging instrument’s effectiveness will beassessed.  Both at the inception of thehedge and on an ongoing basis, the Partnership assesses whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair value of hedged items. The derivative instruments that qualify for hedge accounting are fairvalue hedges.

 

ThePartnership has a daily margin requirement with its broker based on the priorday’s market results on open futures contracts. The required brokerage margin balance was $5 thousand and$9.0 million at September 30, 2009 and December 31, 2008,respectively.

 

12

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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

 

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 in accordance with guidance issued by theFASB.

 

***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 as a cash flowhedge and accounted for in accordance with guidance issued by the FASB.  The first collar, which became effective on May 14,2007 and expires on May 14, 2011, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. Under the first collar, the Partnership capped its exposure at a maximumthree-month LIBOR rate of 5.75% and established a minimum floor rate of 3.75%.  As of September 30, 2009, thethree-month LIBOR rate of 0.45% was lower than the floor rate.  As a result, in November 2009, thePartnership will remit to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$440,000 and, at September 30, 2009, was recorded in accrued expenses and othercurrent liabilities on the accompanying consolidated balance sheet.  Asof September 30,2009, the fair value of the first collar was a liability of approximately $4.4 million and was recorded in both other long-termliabilities and accumulated other comprehensive income.  Hedge effectiveness was assessed at inceptionand is assessed quarterly, prospectively and retrospectively.  The changes in the fair value of the firstcollar are expected to be highly effective in offsetting the changes ininterest rate payments attributable to fluctuations in the three-month LIBORrate above and below the first collar’s strike rates.  Ineffectivenessrelated to the first collar was immaterial at September 30, 2009.

 

On September 29, 2008, thePartnership executed its second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthlyinterest payments made on the Partnership’s $100.0 million one-month LIBOR-based borrowings (and subsequentrefinancings thereof) due to changes in the one-month LIBOR rate.  Under the second collar, the Partnershipcapped its exposure at a maximum one-month LIBOR rate of 5.50% and established a minimum floor rate of2.70%.  As of September 30, 2009, theone-month LIBOR rate of 0.26% was lower than the floor rate.  As a result, in October 2009, thePartnership remitted to the respective financial institution the difference betweenthe floor rate and the current rate which amounted to approximately $196,700and, at September 30, 2009, was recorded in accrued expenses and othercurrent liabilities on the accompanying consolidated balance sheet.  Asof September 30, 2009, the fair value of the second collar was a liabilityof approximately $3.7 millionand was recorded in both other long-term liabilities and

 

13

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

accumulated other comprehensiveincome in the accompanying consolidated balance sheet.  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.  Ineffectivenessrelated to the second collar was immaterial at September 30, 2009.

 

Thefollowing table presents the fair value of the Partnership’s derivativeinstruments and their location in the Partnership’s consolidated balance sheetsat September 30, 2009 and December 31, 2008 (in thousands):

 
| ** **                                       | ** ** | **Assets**        | ** ** | **Liabilities**        | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                       | ** ** | ** **        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                       | ** ** | **Balance Sheet** | ** ** | **2009**               | ** ** | **2008** | ** ** | **Balance Sheet** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives**                                  | ** ** | **Location**      | ** ** | **Fair Value**         | ** ** | **Fair Value** | ** ** | **Location** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| * *                                         |       |              |       |                   |       |   |   |   |   |   |   |   |   |
| *Derivatives designated as  hedging instruments* |       |              |       |                   |       |   |   |   |   |   |   |   |   |
| Interest  rate collars                           |       |              |       | $                      | —     |   | $ | — |   | Other  long-term liabilities |   | $ | 8,105 |   | $ | 10,846 |   |
|                                                  |            |                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 and nine months ended September 30,2009 and 2008 (in thousands):

 
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **Recognized in Income** | ** ** |
|--------------------------|------------|---------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **on Derivatives**       | ** ** |
| ** **               | ** ** | **Amount of Gain (Loss)** | ** ** | **(Ineffectiveness Portion** | ** ** |
| ** **               | ** ** | **Recognized in Other**   | ** ** | **and Amount Excluded**      | ** ** |
| ** **               | ** ** | **Comprehensive Income**  | ** ** | **from Effectiveness**       | ** ** |
| ** **               | ** ** | **on Derivatives**        | ** ** | **Testing)**                 | ** ** |
| **Derivatives in**       | ** ** | **Three Months Ended**    | ** ** | **Three Months Ended**       | ** ** |
| **Cash Flow**            | ** ** | **September 30,**    | ** ** | **September 30,**       | ** ** | **September 30,**   | ** ** | **September 30,** | ** ** |
| **Hedging Relationship** | ** ** | **2009**                  | ** ** | **2008**                     | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                     |       |                      |       |                         |       |                     |       |   |   |
| Interest  rate collars   |       | $                         | (674       | )                            | $          | (251                     | )          | $ | — |   | $ | — |   |
|                          |            |                           |            |                              |            |                          |            |  |  |  |  |  |  |

 
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **Recognized in Income** | ** ** |
|--------------------------|------------|---------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **on Derivatives**       | ** ** |
| ** **               | ** ** | **Amount of Gain (Loss)** | ** ** | **(Ineffectiveness Portion** | ** ** |
| ** **               | ** ** | **Recognized in Other**   | ** ** | **and Amount Excluded**      | ** ** |
| ** **               | ** ** | **Comprehensive Income**  | ** ** | **from Effectiveness**       | ** ** |
| ** **               | ** ** | **on Derivatives**        | ** ** | **Testing)**                 | ** ** |
| **Derivatives in**       | ** ** | **Nine Months Ended**     | ** ** | **Nine Months Ended**        | ** ** |
| **Cash Flow**            | ** ** | **September 30,**    | ** ** | **September 30,**       | ** ** | **September 30,**   | ** ** | **September 30,** | ** ** |
| **Hedging Relationship** | ** ** | **2009**                  | ** ** | **2008**                     | ** ** | **2009**                 | ** ** | **2008** | ** ** |
|                     |       |                      |       |                         |       |                     |       |   |   |
| Interest rate collars    |       | $                         | 2,741      |                         | $          | (367                     | )          | $ | — |   | $ | — |   |
|                          |            |                           |            |                              |            |                          |            |  |  |  |  |  |  |

 

Ineffectiveness relatedto the interest rate collars is recognized as interest expense and wasimmaterial at September 30, 2009. The effective portion related to the interest rate collars that wasoriginally reported in other comprehensive income and reclassified to earningswas $1.4 million and $3.7 million for the three and nine months endedSeptember 30, 2009, respectively.

 

14

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

***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 associatedwith inclement weather conditions.  Inconnection with managing these positions and maintaining a constant presence inthe marketplace, both necessary for its business, the Partnership engages in acontrolled trading program for up to an aggregate of 250,000 barrels of refinedpetroleum products at any one point in time.

 

Thefollowing table presents the amount of gains and losses from derivatives notinvolved in a hedging relationship recognized in the Partnership’s consolidatedstatements of income for the three and nine months ended September 30,2009 and 2008 (in thousands):

 
| ** **                         | ** ** | ** **         | ** ** | **Amount  of Gain (Loss)** | ** ** | **Amount  of Gain (Loss)** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Location  of**   | ** ** | **Recognized  in Income**  | ** ** | **Recognized  in Income**  | ** ** |
| ** **                         | ** ** | **Gain  (Loss)**   | ** ** | **on  Derivatives**        | ** ** | **on  Derivatives**        | ** ** |
| ** **                         | ** ** | **Recognized  in** | ** ** | **Three  Months Ended**    | ** ** | **Nine  Months Ended**     | ** ** |
| **Derivatives  Not Designated as** | ** ** | **Income  on**     | ** ** | **September 30,**     | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **Hedging  Instruments**           | ** ** | **Derivatives**    | ** ** | **2009**                   | ** ** | **2008**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|                               |       |               |       |                       |       |                       |       |   |   |   |   |
| Oil product  contracts             |       | Cost of sales      |       | $                          | 2,402      |                       | $          | 3,030 |   | $ | 8,154 |   | $ | 7,533 |   |
|                                    |            |                    |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

**Note 6.**                      Debt

** **

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

 

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

 

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

 

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

 

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

 

15

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

 

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

 

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

 

Commencing July 21, 2008, borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe Credit Agreement, as amended, which in turn depends upon the CombinedInterest Coverage Ratio (as such term is defined in the Credit Agreement).  Commencing July 21, 2008, borrowings under the acquisition andrevolving credit facilities bear interest at (1) the Eurodollar rate plus2.25% to 2.75%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe Credit Agreement, as amended, which in turn depends upon the CombinedInterest Coverage Ratio.  The averageinterest rates were approximately 3.5% and 4.5% for the three months ended September 30,2009 and 2008, respectively, and 3.7% and 4.3% for the nine months ended September 30,2009 and 2008, respectively.

 

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

 

ThePartnership incurs a letter of credit fee of 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 $254.2 million and $154.1 million at September 30,2009 and December 31, 2008, respectively, representing the amountsexpected to be outstanding during the year. In addition, the Partnership classifies a portion of its working capitalrevolving credit facility as a current liability because it repays amountsoutstanding and reborrows funds based on its working capital requirements.  The current portion of the working capitalrevolving credit facility was approximately $113.5 million and$208.2 million at September 30, 2009 and December 31, 2008,respectively, representing the amounts the Partnership expects to pay downduring the course of the year.

 

16

----

 

**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

 

Asof September 30, 2009, the Partnership had total borrowings outstandingunder the Credit Agreement of $438.9 million, including $71.2 millionoutstanding on the acquisition facility. In addition, the Partnership had outstanding letters of credit of$64.5 million.  The total remainingavailability for borrowings and letters of credit at September 30, 2009and December 31, 2008 was $246.6 million and $211.3 million,respectively.

 

TheCredit Agreement is secured by substantially all of the assets of thePartnership and each of the Companies and is guaranteed by the GeneralPartner.  The Credit Agreement imposes certainrequirements including, for example, a prohibition against distributions if anypotential default or Event of Default (as defined in the Credit Agreement)would occur, and limitations on the Partnership’s ability to grant liens, makecertain loans or investments, incur additional indebtedness or guarantee otherindebtedness, make any material change to the nature of the Partnership’sbusiness or undergo a fundamental change, make any material dispositions,acquire another company, enter into a merger, consolidation, sale leasebacktransaction or purchase of assets, or make capital expenditures in excess ofspecified levels.

 

TheCredit Agreement imposes financial covenants that require the Partnership tomaintain certain minimum working capital amounts, capital expenditure limits, aminimum EBITDA ratio, a minimum combined interest coverage ratio and a maximumleverage ratio.  The Partnership was incompliance with the foregoing covenants at September 30, 2009.  The Credit Agreement also contains a representationwhereby there can be no event or circumstance, either individually or in theaggregate, that has had or could reasonably be expected to have a MaterialAdverse Effect (as defined in the Credit Agreement).

 

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

 

TheCredit Agreement limits distributions by the Partnership to its unitholders tothe amount of the Partnership’s available cash and permits borrowings to fundsuch distributions only under the $15.0 million revolving credit facility.  The revolving credit facility is subject toan annual “clean-down” period, requiring the Partnership to reduce the amountoutstanding under the revolving credit facility to $0 for 30 consecutivecalendar days in each calendar year.  ThePartnership has complied with this provision for the year ending December 31,2009.

 

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

 

17

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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

 
| ** **                     | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                     | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                   |       | $                       | 325        |                   | $          | 265 |   | $ | 975 |   | $ | 796 |   |
| Interest cost                  |       | 230                     |       | 200                    |       | 687 |   | 600 |   |
| Expected return on plan assets |       | (161                    | )          | (166                   | )          | (482 | ) | (496 | ) |
| Recognized net actuarial loss  |       | 48                      |       | 1                      |       | 144 |   | 1 |   |
| Net periodic benefit cost      |       | $                       | 442        |                   | $          | 300 |   | $ | 1,324 |   | $ | 901 |   |

 

**Note 8.**                      Related PartyTransactions

** **

ThePartnership is a party to a Second Amended and Restated Terminal Storage Rentaland Throughput Agreement with Global Petroleum Corp. (“GPC”), an affiliate ofthe Partnership, which extends through December 2013 with annual renewaloptions thereafter.  The agreement isaccounted for as an operating lease.  Theexpenses under this agreement totaled approximately $2.1** **millionand $2.2** **million for the three monthsended September 30,****2009 and 2008,respectively, and approximately $6.3** **millionand $6.4** **million for the nine months endedSeptember 30,****2009 and 2008,respectively.

 

Pursuantto an Amended and Restated Services Agreement with GPC, GPC provides certainterminal operating management services to the Partnership and uses certain administrative,accounting and information processing services of the Partnership.  The expenses from these services totaledapproximately $18,500 and $21,500 for the three months ended September 30,2009 and 2008, respectively, and approximately $55,000 and $64,500 for the ninemonths ended September 30, 2009 and 2008, respectively.  These charges were recorded in selling,general and administrative expenses in the accompanying consolidated statementsof income.  The agreement is for anindefinite term, and either party may terminate its receipt of some or all ofthe services thereunder upon 180 days’ notice at any time after January 1,2009.  As of September 30, 2009, nosuch notice of termination was given by either party.

 

Pursuantto the Partnership’s Amended and Restated Services Agreement with AllianceEnergy LLC (formerly known as Alliance Energy Corp.) (“Alliance”), thePartnership also provides certain administrative, accounting and informationprocessing services, and the use of certain facilities, to Alliance, anaffiliate of the Partnership that is wholly owned by AE Holdings Corp.,which is approximately 95% owned by members of the Slifka family.  The income from these services wasapproximately $95,500 and $216,500 for the three months ended September 30,2009 and 2008, respectively, and $286,500 and $649,500 for the nine monthsended September 30, 2009 and 2008, respectively.  These fees were recorded as an offset toselling, general and administrative expenses in the accompanying consolidatedstatements of income.  The agreementextends through January 1, 2010.

 

ThePartnership sells refined petroleum products to Alliance at prevailing marketprices at the time of delivery.  Sales toAlliance were approximately $5.7 million for each of the three monthsended September 30, 2009 and 2008, and $12.3 million and$25.1 million for the nine months ended September 30, 2009 and 2008,respectively.

 

18

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

TheGeneral Partner employs substantially all of the Partnership’s employees andcharges the Partnership for their services. The expenses for the three months ended September 30, 2009 and 2008,including payroll, payroll taxes and bonus accruals, were $9.2 million and$6.5 million, respectively, and $29.1 million and $20.9 millionfor the nine months ended September 30, 2009 and 2008, respectively.  The Partnership also reimburses the GeneralPartner for its contributions under the General Partner’s 401(k) Savingsand Profit Sharing Plan and the General Partner’s qualified and non-qualifiedpension plans.

 

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

 
| ** **                                | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables from Alliance                 |       | $                            | 1,251      |                        | $          | 383 | ** ** |
| Receivables from GPC                      |       | 207                          |       | 325                         |       |
| Receivables from the  General Partner (1) |       | 3,263                        |       | 1,810                       |       |
| Total                                     |       | $                            | 4,721      |                        | $          | 2,518 |   |

 

(1)  Receivables from the General Partner reflect the Partnership’sprepayment of payroll taxes and payroll accruals 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 cash flows, capitalrequirements, financial condition and other factors.  The Credit Agreement prohibits thePartnership from making cash distributions if any potential default or event ofdefault, as defined in the Credit Agreement, occurs or would result from thecash distribution.

 

Within45 days after the end of each quarter, the Partnership will distribute all ofits available cash (as defined in its partnership agreement) to unitholders ofrecord on the applicable record date. The amount of available cash is all cash on hand at the end of thequarter; plus all cash on hand on the date of determination of available cashfor the quarter resulting from working capital borrowings made after the end ofthe quarter; less the amount of cash reserves established by the GeneralPartner to provide for the proper conduct of the Partnership’s business, tocomply with applicable law, any of the Partnership’s debt instruments, or otheragreements or to provide funds for distributions to unitholders and to theGeneral Partner for any one or more of the next four quarters.  Working capital borrowings are generallyborrowings that are made under the Credit Agreement and in all cases are usedsolely for working capital purposes or to pay distributions to partners.

 

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

 

19

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 9.**                      CashDistributions (continued)

** **

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

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

 

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

 
| **Cash  Distribution  Payment Date** | ** ** | **Per Unit  Cash  Distribution** | ** ** | **Common  Units** | ** ** | **Subordinated  Units** | ** ** | **General  Partner** | ** ** | **Incentive  Distribution** | ** ** | **Total Cash  Distribution** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------|------------|-------------------------|------------|----------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| 02/13/09(1)                               |       | $0.4875                               |       | $3,621            |       | $2,751                  |       | $112                 |       | $    50 |       | $    6,534    |       |
| 05/15/09(2)                               |       | $0.4875                               |       | $3,621            |       | $2,751                  |       | $112                 |       | $    50 |       | $    6,534    |       |
| 08/14/09(3)                               |       | $0.4875                               |       | $3,621            |       | $2,751                  |       | $112                 |       | $    50 |       | $    6,534    |       |

 

(1)   Thisdistribution of $0.4875 per unit resulted in the Partnership reaching itssecond target distribution for the fourth quarter of 2008.  As a result, the General Partner, as theholder of the IDRs, received this additional incentive distribution.

(2)   Thisdistribution of $0.4875 per unit resulted in the Partnership reaching itssecond target distribution for the first quarter of 2009.  As a result, the General Partner, as theholder of the IDRs, received this additional incentive distribution.

(3)   Thisdistribution of $0.4875 per unit resulted in the Partnership reaching itssecond target distribution for the second quarter of 2009.  As a result, the General Partner, as theholder of the IDRs, received this additional incentive distribution.

 

Inaddition, on October 21, 2009, the board of directors of the GeneralPartner declared a quarterly cash distribution of $0.4875 per unit for theperiod from July 1, 2009 through September 30, 2009 ($1.95 per uniton an annualized basis).  On November 13, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business November 4, 2009.  Thisdistribution will result in the Partnership reaching its second targetdistribution for the quarter ended September 30, 2009.

 

**Note 10.**               Segment Reporting

** **

ThePartnership is a wholesale and commercial distributor of gasoline, distillatesand residual oil whose business is organized within two operating segments,Wholesale and Commercial, based on the way the chief operating decision maker(CEO) manages the business and on the similarity of customers and expectedlong-term financial performance of each segment.  The accounting policies of the segments arethe same as those described in Note 2, “Summary of Significant AccountingPolicies,” in the Partnership’s Annual Report on Form 10-K for the year endedDecember 31, 2008.

 

Inthe Wholesale segment, the Partnership sells gasoline, home heating oil,diesel, kerosene and residual oil to unbranded retail gasoline stations andother resellers of transportation fuels, home heating oil retailers and wholesaledistributors.  Generally, customers usetheir own vehicles or contract carriers to take delivery of the product at bulkterminals and inland storage facilities that the Partnership owns or controlsor with which it has throughput arrangements.

 

20

----

 

**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 the business, it is not reasonablypossible for the Partnership to allocate the components of operating costs andexpenses between the reportable segments. Additionally, due to the commingled nature and uses of the Partnership’sassets, it is not reasonably possible for the Partnership to allocate assetsbetween the two segments.  There were nointersegment sales for any of the periods presented below.

 

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Wholesale Segment:**                      |       |                   |       |                   |       |   |   |   |   |
| Sales                                       |       |                   |       |                   |       |   |   |   |   |
| Distillates                                 |       | $                      | 329,362    |                   | $          | 677,381 |   | $ | 1,741,038 |   | $ | 3,164,368 |   |
| Gasoline                                    |       | 871,770                |       | 1,468,790              |       | 2,093,759 |   | 3,727,534 |   |
| Residual oil                                |       | 6,594                  |       | 23,765                 |       | 23,937 |   | 67,342 |   |
| Total                                       |       | $                      | 1,207,726  |                   | $          | 2,169,936 |   | $ | 3,858,734 |   | $ | 6,959,244 |   |
| Net product margin (1)                      |       |                   |       |                   |       |   |   |   |   |
| Distillates                                 |       | $                      | 15,456     |                   | $          | 12,001 |   | $ | 62,786 |   | $ | 44,422 |   |
| Gasoline                                    |       | 10,999                 |       | 13,554                 |       | 34,912 |   | 32,522 |   |
| Residual oil                                |       | 1,814                  |       | 412                    |       | 6,928 |   | 7,542 |   |
| Total                                       |       | $                      | 28,269     |                   | $          | 25,967 |   | $ | 104,626 |   | $ | 84,486 |   |
| **Commercial Segment:**                     |       |                   |       |                   |       |   |   |   |   |
| Sales                                       |       | $                      | 77,605     |                   | $          | 102,143 |   | $ | 260,701 |   | $ | 331,536 |   |
| Net product margin (1)                      |       | $                      | 3,717      |                   | $          | 2,460 |   | $ | 11,241 |   | $ | 7,389 |   |
| **Combined sales and net product  margin:** |       |                   |       |                   |       |   |   |   |   |
| Sales                                       |       | $                      | 1,285,331  |                   | $          | 2,272,079 |   | $ | 4,119,435 |   | $ | 7,290,780 |   |
| Net product margin (1)                      |       | $                      | 31,986     |                   | $          | 28,427 |   | $ | 115,867 |   | $ | 91,875 |   |
| Depreciation allocated to  cost of sales    |       | 2,713                  |       | 2,499                  |       | 8,091 |   | 7,658 |   |
| **Combined gross profit**                   |       | $                      | 29,273     |                   | $          | 25,928 |   | $ | 107,776 |   | $ | 84,217 |   |

 

----

(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.

 

21

----

 

**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** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Combined gross profit**                                               |       | $                      | 29,273     |                   | $          | 25,928 |   | $ | 107,776 |   | $ | 84,217 |   |
| **Operating costs and expenses  not allocated to reportable segments:** |       |                   |       |                   |       |   |   |   |   |
| Selling, general and  administrative expenses                           |       | 13,859                 |       | 10,457                 |       | 45,233 |   | 31,712 |   |
| Operating expenses                                                      |       | 8,666                  |       | 8,429                  |       | 26,278 |   | 26,225 |   |
| Amortization expenses                                                   |       | 747                    |       | 738                    |       | 2,350 |   | 2,199 |   |
| **Total operating costs and  expenses**                                 |       | 23,272                 |       | 19,624                 |       | 73,861 |   | 60,136 |   |
| Operating income                                                        |       | 6,001                  |       | 6,304                  |       | 33,915 |   | 24,081 |   |
| Interest expense                                                        |       | (3,742                 | )          | (5,297                 | )          | (10,940 | ) | (15,414 | ) |
| Income tax expense                                                      |       | (200                   | )          | —                 |       | (1,075 | ) | (295 | ) |
| **Net income**                                                          |       | $                      | 2,059      |                   | $          | 1,007 |   | $ | 21,900 |   | $ | 8,372 |   |

 

Therewere no foreign sales for the three and nine months ended September 30,2009 and 2008.  The Partnership has noforeign assets.

 

**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 to deductiblesthat 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.  The remainingliability of $0.5 million was recorded as a current liability of$0.4 million and a long-term liability of $0.1 million on theaccompanying consolidated balance sheet at September 30, 2009.  The remedial action plans submitted byExxonMobil have been implemented by Global Companies LLC.  The Partnership does not believe thatcompliance with the terms thereof will result in material costs in excess ofthe environmental reserve or have a material impact on its operations.

 

22

----

 

**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,of which approximately $0.1 million was paid for the year ended December 31,2008 for a balance of $7.9 million. In June 2008, the Partnership submitted a remedial action work planto NYDEC, implementing NYDEC’s conditional approval of the remedial action plansubmitted by ExxonMobil.  The Partnershipresponded to NYDEC’s requests for additional information and conducted pilottests for the remediation outlined in the work plan.  Based on the results of such pilot tests, thePartnership changed its estimate and reduced the environmental liability by$2.8** **million during the fourth quarterended December 31, 2008.  At September 30,2009, this liability had a balance of $5.0 million which was recorded as acurrent liability of $2.9 million and a long-term liability of$2.1 million on the accompanying consolidated balance sheet.  In July 2009, NYDEC approved theremedial action work plan, and the Partnership signed a Stipulation Agreementwith NYDEC to govern implementation of the approved plan.  The Partnership does not believe thatcompliance with the terms of the approved remedial action work plan will resultin material costs in excess of the environmental reserve or have a materialimpact on its operations.

 

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

 

*Long-Term Incentive Plan*

 

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

 

Accountingguidance for share-based compensation requires that a non-vested equity shareunit awarded to an employee is to be measured at its fair value as if it werevested and issued on the grant date.  Thefair value of the Partnership’s award at the August 14, 2007 grant dateapproximated the fair value of the Partnership’s common unit at that date.

 

23

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

Compensationcost for an award of share-based employee compensation classified as equity, asis the case of the Partnership’s award, is recognized over the requisiteservice period.  The requisite serviceperiod for this award is from August 14, 2007, the grant date, through December 31,2009, the vesting date.  The Partnershipwill recognize as compensation expense the value of the portion of the awardthat is ultimately expected to vest over the requisite service period on astraight-line basis.  In accordance withthe guidance issued by the FASB, the Partnership estimated forfeitures at thetime of grant.  Such estimates, whichwere based on the Partnership’s service and performance history, are revised,if necessary, in subsequent periods if actual forfeitures differ fromestimates.

 

Withrespect to these awards, the Partnership recorded compensation expenses ofapproximately $0.2 million for each of the three months ended September 30,2009 and 2008, and $0.6 million for each of the nine months ended September 30,2009 and 2008, which are included in selling, general and administrativeexpenses in the accompanying consolidated statements of income.  The total compensation cost related to thenon-vested awards not yet recognized at September 30, 2009 isapproximately $0.2 million and is expected to be recognized ratably overthe remaining requisite service period.

 

*Three-Year Phantom Units*

 

OnDecember 31, 2008, the Compensation Committee of the board of directors ofthe General Partner granted 99,700 phantom units to a named executiveofficer, including a contingent right to receive an amount in cash equal to thenumber of phantom units multiplied by the cash distribution per common unitmade by the Partnership from time to time during the period the phantom unitsare outstanding.  The phantom units,which are subject to graded vesting, will vest in six equal installments on June 30and December 31 of each year commencing June 30, 2009.  Compensation expense related to these phantomunits is recognized using the accelerated attribution method.  The Partnership recorded compensation expenserelated to this phantom unit award of approximately $0.1 million and$0.6 million for the three and nine months ended September 30, 2009,respectively, which is included in selling, general and administrative expensesin the accompanying consolidated statements of income.  The total compensation cost related to thenon-vested awards not yet recognized at September 30, 2009 isapproximately $0.5 million and is expected to be recognized over theremaining three-year requisite service period. On June 30, 2009, 16,617 common units vested under this award andwere distributed to the named executive officer.  In addition, in July 2009, thePartnership paid a cash distribution related to these units of approximately$8,000.

 

*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 unit forany 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. See Note 17.

 

24

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

Thefair value of the Partnership’s award at the February 5, 2009 grant dateapproximated the fair value of the Partnership’s common unit at that date,reduced by the present value of the distributions stream on the equivalentnumber of common units over the derived service period.  Compensation cost is recognized ratably overthe derived service period which was determined for each tranche using theMonte Carlo simulation model.  Thederived service period of the award was assessed using expected volatilitywhich was estimated based on historical volatility of the Partnership’sunits.  The Partnership recorded compensationexpense related to this phantom units award of approximately $0.3 millionand $0.4 million for the three and nine months ended September 30,2009, respectively, which is included in selling, general and administrativeexpenses in the accompanying consolidated statements of income.  The total compensation cost related to thenon-vested awards not yet recognized at September 30, 2009 isapproximately $0.7 million and is expected to be recognized ratably overthe 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 September 30,2009, the General Partner repurchased 174,391 common units pursuant to theRepurchase Program for approximately $3.5 million, of which 16,617 common units vested under the *“**Three-YearPhantom Units”* award and 69,444 common units vested under the “*Five-Year Phantom Units”*award.

 

At September 30,2009, common units outstanding excluded 105,480 common units held on behalf ofthe Partnership pursuant to its Repurchase Program and for future satisfactionof the General Partner’s Obligations.

 

*Status of Non-Vested Units*

 

Thefollowing table presents a summary of the status of the non-vested units as of September 30,2009:

 
| ** **                                               | ** ** | **Number of  Non-vested  Units** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| Outstanding non-vested units at January 1,  2009    |       |                             | 162,320    |                                          |       | $ | 18.13 |   |
| Granted                                                  |       |                             | 277,777    |                                          |       | 3.73 |   |
| Vested                                                   |       |                             | (86,061    | )                                             |       | 20.34 |   |
| Forfeited                                                |       |                             | —     |                                          |       | — |   |
| Outstanding non-vested units at September 30,  2009 |       |                             | 354,036    |                                          |       | $ | 6.90 |   |

 

25

----

 

**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 FASB established a fair value hierarchy,which prioritizes the inputs used in measuring fair value into the followingthree 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 September 30, 2009 (in thousands):

 
| ** **                                   | ** ** | ** ** | **Fair Value**         | ** ** | ** ** | ** ** | ** **                        | ** ** |
|----------------------------------------------|------------|------------|------------------------|------------|------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Fair Value Measurements Using** | ** ** |
| ** **                                   | ** ** | ** ** | **2009**               | ** ** | ** ** | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                  |       |       |                   |       |       |       |                              |       |   |   |
| Hedged inventories                           |       |       | $                      | 397,170    |       | $          | —                            |       | $ | 397,170 |   | $ | — |   |
| Fair value of forward fixed price contracts  |       |       | 4,063                  |       | —     |       | 4,063                             |       | — |   |
| Swap agreements and options                  |       |       | 1,648                  |       | 1,513      |       | 135                               |       | — |   |
| Total assets                                 |       |       | $                      | 402,881    |       | $          | 1,513                             |       | $ | 401,368 |   | $ | — |   |
| ** **                                   |       |       |                   |       |       |       |                              |       |   |   |
| **Liabilities:**                             |       |       |                   |       |       |       |                              |       |   |   |
| Obligations on forward fixed price contracts |       |       | $                      | (12,254    | )          | $          | —                            |       | $ | (12,254 | ) | $ | — |   |
| Swap agreements and option contracts         |       |       | (1,927                 | )          | (139       | )          | (1,788                            | )          | — |   |
| Interest rate collars                        |       |       | (8,106                 | )          | —     |       | (8,106                            | )          | — |   |
| Total liabilities                            |       |       | $                      | (22,287    | )          | $          | (139                              | )          | $ | (22,148 | ) | $ | — |   |

 

For assets andliabilities measured on a non-recurring basis during the period, accountingguidance requires quantitative disclosures about the fair value measurementsseparately for each major category. During the quarter ended September 30, 2009, the Partnership didnot remeasure assets or liabilities at fair value on a non-recurring basis.

 

*Financial Instruments*

 

Thefair value of the Partnership’s financial instruments approximated the carryingvalue as of September 30, 2009 and December 31, 2008, in each casedue to the short-term and the variable interest rate nature of the financialinstruments.

 

26

----

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 14.**               Income Taxes

** **

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

 

| ** **                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Federal statutory income tax rate                 |       | 34.                                        | 0%         |                                      | 34.        | 0% |   | 34. | 0% |   | 34. | 0% |   |
| State income tax rate, net of federal tax benefit |       | 6.                                         | 4%         |                                      | 6.         | 4% |   | 6. | 4% |   | 6. | 4% |   |
| Partnership income not subject to tax             |       | (31.                                       | 5)%        |                                      | (51.       | 8)% |   | (35. | 7)% |   | (37. | 0)% |   |
| Effective income tax rate                         |       | 8.                                         | 9%         |                                      | (11.       | 4)% |   | 4. | 7% |   | 3. | 4% |   |

 

**Note 15.**               Legal Proceedings

** **

***General***

 

Althoughthe Partnership may, from time to time, be involved in litigation and claimsarising out of its operations in the normal course of business, the Partnershipdoes not believe that it is a party to any litigation that will have a materialadverse impact on its financial condition or results of operations.  Except as described in the Partnership’sAnnual Report on Form 10-K for the year ended December 31, 2008 and in Note 11 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 its 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.

 

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.  The Partnership will continue to cooperatewith the FTC during its review.  ThePartnership cannot predict the outcome of the FTC’s review or its effect on thetransaction.  As a result of the FTCreview, closing of the transaction will not be completed in 2009 and remainssubject to the FTC review, receipt of certain regulatory approvals and variousother customary closing conditions.

 

**Note 16.**               Recently Issued AccountingGuidance

** **

On September 30,2009, the Partnership adopted guidance issued by the FASB to the authoritativehierarchy of nongovernmental U.S. GAAP. These changes establish the FASB Accounting Standards CodificationTM (“Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with GAAP.  Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standardsin the form of Statements, FASB Staff Positions or Emerging Issue Task ForceAbstracts; instead, the FASB will issue Accounting Standards Updates.  This guidance and the Codification itself donot change GAAP.  Other than the mannerin which new accounting guidance is referenced, the adoption of these changesdid not have an impact on the Partnership’s consolidated financial statements.

 

On June 30, 2009,the Partnership adopted guidance issued by the FASB to fair valueaccounting.  This guidance relates to: (1) estimatingfair value when the volume and level of activity for an asset or liability havesignificantly decreased in relation to normal market activity for the asset orliability, and (2) circumstances that may indicate that a transaction isnot orderly (i.e., forced liquidation or distressed sale).  The adoption of this guidance did not have amaterial impact on the Partnership’s consolidated financial statements.

 

27

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 16.**               Recently Issued AccountingGuidance (continued)

** **

OnJune 30, 2009, the Partnership adopted guidance issued by the FASB to fairvalue accounting.  This guidance requires disclosures aboutthe fair value of financial instruments for interim reporting periods ofpublicly traded companies as well as in annual financial statements.  The adoption of this guidance did not have amaterial impact on the Partnership’s consolidated financial statements.  See Note 13.

 

On June 30, 2009,the Partnership adopted guidance issued by the FASB to subsequent events.  This guidance establishes general standardsof accounting and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.  This guidance requires entities to disclosethe date through which they have evaluated subsequent events and whether thedate corresponds with the release of their financial statements.  The adoption of this guidance did not have animpact on the Partnership’s consolidated financial statements.  See Note 17.

 

OnJanuary 1, 2009, thePartnership adopted guidance issued by the FASB to fair value accounting anddisclosures.  This guidance providesguidelines for the determination of the unit of accounting for a liabilityissued with an inseparable third-party credit enhancement when it is measuredor disclosed at fair value on a recurring basis.  The effect of the credit enhancement is to beexcluded in the fair value measurement of the liability, and entities arerequired to disclose the existence of the inseparable third-party creditenhancement on the issued liability.  The adoption of this guidance did nothave a material impact on the Partnership’s consolidated financial statements.

 

OnJanuary 1, 2009, thePartnership adopted guidance issued by the FASB to earnings per share.  This guidance provides that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities and,therefore, should be included in the computation of earnings per share pursuantto the two-class method.  However, theaward would not be considered a participating security if the holder forfeitsthe right to receive dividends or dividend equivalents in the event that theaward does not vest.  The adoption ofthis guidance did not have a material impact on the Partnership’s consolidatedfinancial statements.

 

OnJanuary 1, 2009, thePartnership adopted guidance issued by the FASB to earnings per share.  This guidance specifies the treatment ofearnings per unit calculations when incentive distribution rights exist inmaster limited partnerships.  Further, when earnings exceed cash distributions,undistributed earnings are to be allocated to the general partner, limitedpartners and holders of the incentive distribution rights based on thedistribution formula for available cash set forth in the partnershipagreement.  Conversely, when cashdistributions exceed earnings, net income (or loss) would be reduced (orincreased) by distributions to the general partner, limited partners andholders of incentive distribution rights. The excess of distributions over earnings would be allocated to thegeneral partner and limited partners based on their respective sharing oflosses set forth in the partnership agreement. The adoption of this guidance did not have a material impact on thePartnership’s consolidated financial statements.  See Note 2.

 

OnJanuary 1, 2009, thePartnership adopted guidance issued by the FASB to intangible assets.  This guidance amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset.  The objective is to improve the consistencybetween the useful life of a recognized intangible asset and the period ofexpected cash flows used to measure the fair value of the asset. The adoption of this guidance did not have a material impact on thePartnership’s consolidated financial statements.

 

On January 1, 2009, the Partnership adopted guidance issued by the FASBwhich requires enhanced disclosures about an entity’s derivatives and hedgingactivities and how they affect an entity’s financial position, financialperformance and cash flows.  SeeNote 5.

 

28

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**Note 16.**               Recently Issued AccountingGuidance (continued)

** **

On January 1, 2009,the Partnership adopted guidance issued by the FASB to accounting for businesscombinations.  This guidance defines theacquirer as the entity that obtains control of one or more businesses in thebusiness combination, establishes the acquisition date as the date that theacquirer achieves control and requires the acquirer to recognize the assetsacquired, liabilities assumed and any noncontrolling interest at their fairvalues as of the acquisition date.  Thisguidance also requires that acquisition-related costs be recognized separatelyfrom the acquisition.  The adoption ofthis guidance did not have a material impact on the Partnership’s consolidatedfinancial statements.

 

ThePartnership adopted the guidance issued by the FASB to fair value accountingand disclosures.  This guidance definesfair value, establishes guidelines for measuring fair value and requiresadditional disclosures regarding fair value measurements.  This guidance applies only to fair value measurementscurrently required or permitted and are expected to increase the consistency ofthose measurements.  On January 1,2008, the Partnership adopted this guidance for its financial assets andliabilities measuredat fair value on a recurring basis and on January 1, 2009 for its non-financial assets andnon-financial liabilities measured at fair value on a non-recurring basis.  The adoption of this guidance did not have amaterial impact on the Partnership’s consolidated financial statements.  See Note 13.

 

**Note 17.**               Subsequent Events

** **

ThePartnership evaluated all events or transactions that occurred through November 6,2009, the date the Partnership issued its financial statements.  Except as described below, no materialsubsequent events have occurred since September 30, 2009 that required recognitionor disclosure in the accompanying financial statements.

 

On November 5, 2009,the Partnership filed a definitive proxy statement with the SEC in connectionwith a proposal to amend its partnership agreement.  The definitive proxy materials will be mailedto unitholders of record as of November 5, 2009.

 

On October 22, 2009,the FTC issued a Civil Investigative Demand and a Subpoena Duces Tecum inconnection with the FTC’s regulatory review of the Partnership’s plannedacquisition of three refined petroleum terminal facilities in Newburgh, NewYork from Warex Terminals Corporation. The Partnership will continue to cooperate with the FTC during itsreview.  The Partnership cannot predictthe outcome of the FTC’s review or its effect on the transaction.  As a result of the FTC review, closing of thetransaction will not be completed in 2009 and remains subject to the FTCreview, receipt of certain regulatory approvals and various other customaryclosing conditions

 

In October 2009, thePartnership executed a forward starting swap with a major financialinstitution.  This swap, which willbecome effective on May 16, 2011 and expire on May 16, 2016, will beused to hedge the variability in interest payments due to changes in theone-month LIBOR rate with respect to $100.0 million of one-month LIBOR-based borrowings at a fixed rateof 3.93%.

 

OnOctober 21, 2009, theboard of directors of the General Partner declared a quarterly cashdistribution of $0.4875 per unit ($1.95 per unit on an annualized basis) forthe period from July 1, 2009 through September 30, 2009.  On November 13, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business November 4, 2009.

 

OnOctober 14, 2009, the GeneralPartner distributed 69,444 common units pursuant to the Repurchase Program (seeNote 12).

 

29

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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**

** **

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

 

·              Wemay not have sufficient cash from operations to enable us to pay the minimumquarterly distribution 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.

 

·              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.

 

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·              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, 2008 and Part II, Item 1A, “Risk Factors,” in thisQuarterly Report on Form 10-Q.

 

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

 

**Overview**

** **

***General***

*** ***

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in Massachusetts, Maine, Connecticut, Vermont, NewHampshire, Rhode Island, New York, New Jersey and Pennsylvania (collectively,the “Northeast”).  We are one of thelargest wholesale distributors of gasoline, distillates (such as home heatingoil, diesel and kerosene) and residual oil to wholesalers, retailers andcommercial customers in the Northeast. For the three and nine months ended September 30, 2009, we soldapproximately $1.3 billion and $4.1 billion, respectively, of refinedpetroleum products and small amounts of natural gas.

 

Wepurchase our refined petroleum products primarily from domestic and foreignrefiners (wholesalers), traders and producers and sell these products in twosegments, Wholesale and Commercial.  Likemost independent marketers of refined petroleum products, we base our pricingon spot physical prices and routinely use the NYMEX or other derivatives tohedge our commodity risk inherent in buying and selling energycommodities.  Through the use ofregulated exchanges or derivatives, we maintain a position that issubstantially balanced between purchased volumes and sales volumes or futuredelivery obligations.  We earn a marginby selling the product for physical delivery to third parties.

 

***Productsand Operational Structure***

*** ***

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

 

Ourbusiness is divided into two segments:

 

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

 

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

 

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Ourbusiness activities are substantially comprised of purchasing, storing,terminalling and selling refined petroleum products.  In a contango market (when product prices forfuture deliveries are higher than for current deliveries), we may use ourstorage capacity to improve our margins by storing products we have purchasedat lower prices in the current market for delivery to customers at higherprices in the future.  In a backwardatedmarket (when product prices for future deliveries are lower than currentdeliveries), we attempt to minimize our inventories to reduce commodity riskand maintain or increase net product margins. See Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-Kfor the year ended December 31, 2008 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 the pastseveral months, world financial markets experienced a severe reduction in theavailability of credit.  Although we havenot been negatively impacted by this condition in the short-term, it isdifficult to predict its impact on us in future quarters.  Possible negative impacts include a decreasein the availability of borrowings under our credit agreement, increasedcounterparty credit risk on our derivatives contracts and our contractualcounterparties requiring us to provide collateral.  In addition, we could experience a tighteningof trade credit from our suppliers.

 

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

 

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

 

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

 

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·              *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 supply, marketing andterminalling operations are influenced by prices for refined petroleumproducts, 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 petroleumprices may (1) diminish our access to trade credit support and/or cause itto 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 of borrowingbase 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, stateand local laws and regulations regulating product quality specifications andother environmental matters.  The trendin environmental regulation is towards more restrictions and limitations onactivities that may affect the environment. Our business may be adversely affected by increased costs andliabilities resulting from such stricter laws and regulations.  We try to anticipate future regulatoryrequirements that might be imposed and plan accordingly to remain in compliancewith changing environmental laws and regulations and to minimize the costs ofsuch compliance.  However, there can beno assurances as to the timing and type of such changes in existing laws or thepromulgation of new laws or the amount of any required expenditures associatedtherewith.

 

**Results of Operations**

** **

***EvaluatingOur Results of Operations***

*** ***

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

 

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* *

*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 product marginmay not be comparable to net product margin or a similarly titled measure ofother companies.

 

*Gross Profit*

 

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

 

*Selling, General andAdministrative Expenses*

* *

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

 

*Operating Expenses*

* *

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

 

*Degree Day*

* *

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

 

*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;

 

34

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

 

***Threeand nine months ended September 30, 2009 and 2008***

*** ***

Duringthe three and nine months ended September 30, 2009, we experienced thefollowing events:

 

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

 

·                  Temperaturesfor the three months ended September 30, 2009 were 9% colder than normaland 35% colder than the third quarter of 2008. Temperatures for the nine months ended September 30, 2009 were 1%colder than normal and 8% colder than the same period in 2008.

 

·                  Weincreased our reserve for credit losses by expensing approximately$0.4 million and $1.5 million for the three and nine months ended September 30,2009, respectively.

 

·                  Webelieve heating oil conservation continued during the three and nine monthsended September 30, 2009 even though prices declined.

 

·                  Additionally,we experienced the following events during the first quarter of 2008 that wedid not experience during the three and nine months ended September 30,2009:

 

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

 

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

 

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

 

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Thefollowing table provides the prices of and percentage decreases in refinedpetroleum product and natural gas prices at the end of the first three quartersin 2009 as compared to each comparable quarter in 2008:

 

| **Period:**                 | ** ** | ** ** | **Heating  Oil**$ per  gallon(1) | ** ** | ** ** | **Gasoline**$ per  gallon(1) | ** ** | ** ** | **Residual  Oil**$ per  barrel(2) | ** ** | ** ** | **Natural  Gas**$ per barrel  equivalent(3) | ** ** |
|-----------------------------|------------|------------|---------------------------------------|------------|------------|-----------------------------------|------------|------------|----------------------------------------|------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** **                            | ** ** | ** ** | ** **                        | ** ** | ** ** | ** **                             | ** ** | ** ** | ** **                                       | ** ** |
| At  March 31, 2008     |       |       | $3.05                                 |       |       | $2.62                             |       |       | $72.75                                 |       |       | $64.38                                           |       |
| At  March 31, 2009     |       |       | $1.34                                 |       |       | $1.40                             |       |       | $40.00                                 |       |       | $25.96                                           |       |
| Change                      |       |       | (56%)                                 |       |       | (47%)                             |       |       | (45%)                                  |       |       | (60%)                                            |       |
|                        |       |       |                                  |       |       |                              |       |       |                                   |       |       |                                             |       |
| At  June 30, 2008      |       |       | $3.90                                 |       |       | $3.50                             |       |       | $111.30                                |       |       | $86.37                                           |       |
| At  June 30, 2009      |       |       | $1.72                                 |       |       | $1.90                             |       |       | $62.50                                 |       |       | $26.15                                           |       |
| Change                      |       |       | (56%)                                 |       |       | (46%)                             |       |       | (44%)                                  |       |       | (70%)                                            |       |
|                        |       |       |                                  |       |       |                              |       |       |                                   |       |       |                                             |       |
| At  September 30, 2008 |       |       | $2.86                                 |       |       | $2.48                             |       |       | $83.55                                 |       |       | $47.41                                           |       |
| At  September 30, 2009 |       |       | $1.80                                 |       |       | $1.73                             |       |       | $63.15                                 |       |       | $22.62                                           |       |
| Change                      |       |       | (37%)                                 |       |       | (30%)                             |       |       | (24%)                                  |       |       | (52%)                                            |       |
|                        |       |       |                                  |       |       |                              |       |       |                                   |       |       |                                             |       |

 

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

***(2)     Source:  Platts Oilgram Price Report***

***(3)     Source:  Platts Gas Daily Report***

 

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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** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                             |       | $                      | 2,059      |                   | $          | 1,007 |   | $ | 21,900 |   | $ | 8,372 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Net income per diluted limited partner unit (1)        |       | $                      | 0.15       |                   | $          | 0.07 |   | $ | 1.60 |   | $ | 0.62 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| EBITDA (2)                                             |       | $                      | 9,980      |                   | $          | 10,053 |   | $ | 45,932 |   | $ | 35,322 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| Distributable cash flow  (3)                           |       | $                      | 4,978      |                   | $          | 4,151 |   | $ | 30,262 |   | $ | 18,208 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| **Wholesale Segment:**                                 |       |                   |       |                   |       |   |   |   |   |
| Volume (gallons)                                       |       | 650,983                |       | 713,171                |       | 2,372,373 |   | 2,404,319 |   |
| Sales                                                  |       |                   |       |                   |       |   |   |   |   |
| Distillates                                            |       | $                      | 329,362    |                   | $          | 677,381 |   | $ | 1,741,038 |   | $ | 3,164,368 |   |
| Gasoline                                               |       | 871,770                |       | 1,468,790              |       | 2,093,759 |   | 3,727,534 |   |
| Residual oil                                           |       | 6,594                  |       | 23,765                 |       | 23,937 |   | 67,342 |   |
| Total                                                  |       | $                      | 1,207,726  |                   | $          | 2,169,936 |   | $ | 3,858,734 |   | $ | 6,959,244 |   |
| Net product margin (4)                                 |       |                   |       |                   |       |   |   |   |   |
| Distillates                                            |       | $                      | 15,456     |                   | $          | 12,001 |   | $ | 62,786 |   | $ | 44,422 |   |
| Gasoline                                               |       | 10,999                 |       | 13,554                 |       | 34,912 |   | 32,522 |   |
| Residual oil                                           |       | 1,814                  |       | 412                    |       | 6,928 |   | 7,542 |   |
| Total                                                  |       | $                      | 28,269     |                   | $          | 25,967 |   | $ | 104,626 |   | $ | 84,486 |   |
| **Commercial Segment:**                                |       |                   |       |                   |       |   |   |   |   |
| Volume (gallons)                                       |       | 46,728                 |       | 38,439                 |       | 167,989 |   | 142,018 |   |
| Sales                                                  |       | $                      | 77,605     |                   | $          | 102,143 |   | $ | 260,701 |   | $ | 331,536 |   |
| Net product margin (4)                                 |       | $                      | 3,717      |                   | $          | 2,460 |   | $ | 11,241 |   | $ | 7,389 |   |
| **Combined sales and net product  margin:**            |       |                   |       |                   |       |   |   |   |   |
| Sales                                                  |       | $                      | 1,285,331  |                   | $          | 2,272,079 |   | $ | 4,119,435 |   | $ | 7,290,780 |   |
| Net product margin (4)                                 |       | $                      | 31,986     |                   | $          | 28,427 |   | $ | 115,867 |   | $ | 91,875 |   |
| Depreciation allocated to  cost of sales               |       | 2,713                  |       | 2,499                  |       | 8,091 |   | 7,658 |   |
| **Combined gross profit**                              |       | $                      | 29,273     |                   | $          | 25,928 |   | $ | 107,776 |   | $ | 84,217 |   |
|                                                   |       |                   |       |                   |       |   |   |   |   |
| **Weather conditions:**                                |       |                   |       |                   |       |   |   |   |   |
| Normal heating degree days                             |       | 96                     |       | 96                     |       | 3,750 |   | 3,781 |   |
| Actual heating degree days                             |       | 105                    |       | 78                     |       | 3,798 |   | 3,527 |   |
| Variance from normal  heating degree days              |       | 9%                     |       | (19%                   | )          | 1% |   | (7% | ) |
| Variance from prior period  actual heating degree days |       | 35%                    |       | 26%                    |       | 8% |   | (7% | ) |

 

----

(1)    See Note 2 of Notes to ConsolidatedFinancial Statements for net income per diluted limited partner unitcalculation.

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

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

(4)    Net product margin is a non-GAAP financialmeasure which is discussed above under “—Evaluating Our Results ofOperations.”  The table above reconcilesnet product margin on a combined basis to gross profit, a directly comparableGAAP financial measure.

 

37

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

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Reconciliation of net income to EBITDA:**                                  |       |                   |       |                   |       |   |   |   |   |
| Net income                                                                   |       | $                      | 2,059      |                   | $          | 1,007 |   | $ | 21,900 |   | $ | 8,372 |   |
| Depreciation and amortization and amortization of  deferred financing fees   |       | 3,979                  |       | 3,749                  |       | 12,017 |   | 11,241 |   |
| Interest expense                                                             |       | 3,742                  |       | 5,297                  |       | 10,940 |   | 15,414 |   |
| Income tax expense                                                           |       | 200                    |       | —                 |       | 1,075 |   | 295 |   |
| EBITDA                                                                       |       | $                      | 9,980      |                   | $          | 10,053 |   | $ | 45,932 |   | $ | 35,322 |   |
|                                                                         |       |                   |       |                   |       |   |   |   |   |
| **Reconciliation  of cash flow provided by operating activities to EBITDA:** |       |                   |       |                   |       |   |   |   |   |
| Cash flow provided by operating activities                                   |       | $                      | 5,597      |                   | $          | 60,097 |   | $ | 25,778 |   | $ | 54,124 |   |
| Net changes in operating assets and liabilities and  certain non-cash items  |       | 441                    |       | (55,341                | )          | 8,139 |   | (34,511 | ) |
| Interest expense                                                             |       | 3,742                  |       | 5,297                  |       | 10,940 |   | 15,414 |   |
| Income tax expense                                                           |       | 200                    |       | —                 |       | 1,075 |   | 295 |   |
| EBITDA                                                                       |       | $                      | 9,980      |                   | $          | 10,053 |   | $ | 45,932 |   | $ | 35,322 |   |

 

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** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Reconciliation of net income to  distributable****cash flow:**                              |       |                   |       |                   |       |   |   |   |   |
| Net income                                                                                    |       | $                      | 2,059      |                   | $          | 1,007 |   | $ | 21,900 |   | $ | 8,372 |   |
| Depreciation and amortization and amortization of  deferred financing fees                    |       |                   | 3,979      |                   |       | 3,749 |   |   | 12,017 |   |   | 11,241 |   |
| Maintenance capital  expenditures                                                             |       |                   | (1,060     | )                      |       | (605 | ) |   | (3,655 | ) |   | (1,405 | ) |
| Distributable cash flow                                                                       |       | $                      | 4,978      |                   | $          | 4,151 |   | $ | 30,262 |   | $ | 18,208 |   |
|                                                                                          |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| **Reconciliation of cash flow provided by  operating activities to distributable cash flow:** |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Cash flow provided by  operating activities                                                   |       | $                      | 5,597      |                   | $          | 60,097 |   | $ | 25,778 |   | $ | 54,124 |   |
| Net changes in operating  assets and liabilities and certain non-cash items                   |       |                   | 441        |                   |       | (55,341 | ) |   | 8,139 |   |   | (34,511 | ) |
| Maintenance capital  expenditures                                                             |       |                   | (1,060     | )                      |       | (605 | ) |   | (3,655 | ) |   | (1,405 | ) |
| Distributable cash flow                                                                       |       | $                      | 4,978      |                   | $          | 4,151 |   | $ | 30,262 |   | $ | 18,208 |   |

 

38

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***Consolidated Results***

 

Ourtotal sales for the third quarter of 2009 decreased by $986.7 million, or43%, to $1,285.3 million compared to $2,272.1 million for the sameperiod in 2008.  The decrease was driven primarily by significantly lower refinedpetroleum product and natural gas prices for the three months ended September 30,2009 compared to the same period in 2008. Our aggregate volume of product sold decreased by approximately 54 million gallons to 698** **milliongallons.  The decrease in volumeprimarily includes decreases of approximately 35 million gallons, 19 million gallons and 2 million gallons in gasoline, distillates andresidual oil, respectively.  Our grossprofit for the third quarter of 2009 was $29.3** **million,an increase of $3.3** **million,or 13%, compared to $25.9** **millionfor the same period in 2008.  Theincrease was primarily due to higher net product margins in distillates.

 

Ourtotal sales for the nine months ended September 30, 2009 decreased by$3,171.3 million, or 43%, to $4,119.4 million compared to$7,290.8 million for the same period in 2008.  Thedecrease was driven primarily by significantly lower refined petroleum productand natural gas prices for the nine months ended September 30, 2009compared to the same period in 2008.  Ouraggregate volume of product sold decreased by approximately 6 million gallons to 2,540** **milliongallons.  The decrease in volumeprimarily includes decreases of approximately 27 million gallons and 2 million gallons in gasoline and residual oil,respectively, offset by an increase of 16 million gallons in distillates. Our gross profit for the ninemonths ended September 30, 2009 was $107.8** **million,an increase of $23.6** **million,or 28%, compared to $84.2** **millionfor the same period in 2008.  Theincrease was primarily due to higher net product margins in distillates andgasoline.

 

*Wholesale Segment*

* *

Distillates.  Wholesale distillate sales for the threemonths ended September 30, 2009 were $329.3 million compared to$677.4 million for the three months ended September 30, 2008.  During the first nine months of 2009,wholesale distillate sales were $1,741.0 million compared to$3,164.4 million for the same period in 2008.  The decreases of $348.0 million, or 51%,and $1,423.3 million, or 45%, for the three and nine months ended September 30,2009, respectively, were due to the significantlylower refined petroleum product prices.

 

We experienced a 21 milliongallon, or 11%, decrease in distillate volume sold for the third quarter of2009 compared to the same period in 2008 which was attributed to increasedcompetition in the marketplace and continued conservation.  We also experienced a 7 million gallon, or 1%, increase in distillate volume soldfor the nine months ended September 30, 2009 compared to the same periodin 2008.

 

Ournet product margin from distillate sales increased by $3.5 million, or29%, to $15.5 million for the three months ended September 30, 2009and by $18.4 million, or 41% to $62.8 million for the nine monthsended September 30, 2009 compared to the same periods in 2008, primarilyattributable to better unit margins, improved margin and inventory managementand advantageous purchasing opportunities.

 

Gasoline.  Wholesale gasoline sales for the three monthsended September 30, 2009 were $871.8 million compared to$1,468.8 million for the same period in 2008.  During the first nine months of 2009,wholesale gasoline sales were $2,093.8 million compared to$3,727.5 million for the same period in 2008.  The decreases of $597.0 million, or41%, and $1,633.8 million,or 44%, were due primarily to significantly lower gasoline pricescompared to the prior periods and decreases in volume.

 

Ournet product margin from gasoline sales decreased by $2.6 million to$11.0 million for the three months ended September 30, 2009 due tocompetition in the marketplace and a moderate decrease in volume sold.  Our net product margin from gasolineincreased by $2.4 million to $34.9 million for the nine months ended September 30,2009 compared to the same periods in 2008, primarily attributable to betterunit margins, improved margin and inventory management and advantageouspurchasing opportunities.

 

ResidualOil.  Wholesale residualoil sales for the three months ended September 30, 2009 were $6.6 millioncompared to $23.8 million for the three months ended September 30,2008.  During the first nine months of2009, residual oil sales were $23.9 million compared to $67.3 millionfor the same period in 2008.  Thedecreases of $17.2 million, or 72%, and $43.4 million, or 64%, wereprimarily due to significantly lower refined petroleum product prices comparedto the prior periods and decreases in volume sold.  The decreases in volume sold were the resultof continued conservation, current economic conditions and conversion and fuelswitching related to the decrease in natural gas prices compared to residualoil prices.

 

39

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Our net product margin contribution fromresidual oil sales increased by $1.4 million, or 340%, to$1.8 million for the three months ended September 30, 2009, primarilydue to improved year-over-year margin and inventory management.  Our net product margin decreased by$0.6 million, or 8%, to $6.9 million for the nine months ended September 30,2009 compared to the same periods in 2008 due to intensified competition in themarketplace.

 

*Commercial Segment*

* *

Inour Commercial segment, residual oil accounted for approximately 60% and 63% oftotal commercial volume sold for the three months ended September 30, 2009and 2008, respectively, and approximately 62% and 67% for the nine months endedSeptember 30, 2009 and 2008, respectively. Distillates, gasoline and natural gas accounted for the remainder of thetotal volume sold.

 

Commercialresidual oil sales for the quarter ended September 30, 2009 decreased by25% compared to the same period in 2008. For the nine months ended September 30, 2009, residual oil salesdecreased 28% compared to the same period in 2008.  We attribute the decreases in sales to thecompetitive pricing from natural gas and reductions in production by certainindustry participants in our markets.

 

*Selling, General and Administrative Expenses*

 

SG&Aexpenses increased by $3.4 million, or 33%, to $13.8 million for thethree months ended September 30, 2009 compared to $10.4 million forthe same period in 2008.  The increasewas primarily due to increases of $0.6 million in accrued bonuses,$0.5 million in compensation cost on our long-term incentive plan,$0.5 million in due diligence costs on potential expansion projects,$0.4 million in professional fees, $0.4 million in bad debt accrualdue to some credit strain on our customer base, $0.3 million in costsassociated with the expansion of our natural gas operations, and $0.7 millionin various other variable SG&A expenses, including information systems andmarketing and product promotion.

 

SG&Aexpenses increased by $13.5 million, or 43%, to $45.2 million for thenine months ended September 30, 2009 compared to $31.7 million forthe same period in 2008.  The increasewas primarily due to increases of $5.6 million in accrued bonuses,$1.5 million in bad debt accrual due to some credit strain on our customerbase, $1.3 million in professional fees, $1.0 million in compensationcost on our long-term incentive plan, $0.8 million in due diligence costson potential expansion projects, $0.5 million in employee benefits,$0.5 million in bank fees, $0.5 million in costs associated with theexpansion of our natural gas operations and $1.8 million in various othervariable SG&A expenses, including information systems and marketing andproduct promotion.

 

*Operating Expenses*

* *

Operatingexpenses increased by $0.3 million, or 3%, to $8.7 million for thethree months ended September 30, 2009 compared to $8.4 million forthe same period in 2008.  The increasewas primarily due to increased costs of approximately $0.5 million relatedto our recently leased storage facility in Long Island, New York, offset by adecrease of approximately $0.2 million in other operating expenses.

 

Operatingexpenses were relatively flat at $26.3 million for the nine months ended September 30,2009 and $26.2 million for the same period in 2008.  During the firsts nine months of 2009,operating expenses included an increase of $1.2 million in costs relatedto our recently leased storage facility in Long Island, New York, offset bydecreases of $1.0 million in cost savings related to the non-renewal ofthe terminal lease in New Haven, Connecticut and $0.2 million in otheroperating costs.

 

***Interest Expense***

*** ***

Interestexpense for the three months ended September 30, 2009 decreased by$1.6 million, or 29%, to $3.7 million compared to $5.3 millionfor the same period in 2008.  Interestexpense for the nine months ended September 30, 2009 decreased by$4.5 million, or 29%, to $10.9 million compared to $15.4 millionfor the same period in 2008.  Weattribute the decreases primarily to lower average balances on our workingcapital credit facility from carrying lower average balances on inventories andaccounts receivable due to lower refined petroleum product prices.  In addition, interest rates were lower duringthe three and nine months ended September 30, 2009 compared to the sameperiods in 2008.

 

40

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** **

**Liquidity and CapitalResources**

** **

***Liquidity***

** **

Ourprimary liquidity needs are to fund our working capital requirements and ourcapital expenditures.  Cash generatedfrom operations and our working capital revolving credit facility provide ourprimary sources of liquidity.  Workingcapital increased by $102.3 million to $300.9 million at September 30,2009 compared to $198.6 million at December 31, 2008.

 

On February 13, 2009, we paida cash distribution to our common and subordinated unitholders and our generalpartner of approximately $6.5 million for the fourth quarter of 2008.  On May 15, 2009, we paid a cashdistribution to our common and subordinated unitholders and our general partnerof approximately $6.5 million for the first quarter of 2009.  On August 14, 2009, we paid a cashdistribution to our common and subordinated unitholders and our general partnerof approximately $6.5 million for the first quarter of 2009.  On October 21, 2009, the board ofdirectors of our general partner declared a quarterly cash distribution of $0.4875 perunit for the period from July 1, 2009 through September 30, 2009($1.95 per unit on an annualized basis) to our common and subordinatedunitholders of record as of the close of business November 4, 2009.  We expect to pay the cash distribution of approximately$6.5 million on November 13, 2009.

 

***CapitalExpenditures***

*** ***

Ourterminalling operations require investments to expand, upgrade and enhanceexisting operations and to meet environmental and operations regulations.  Our capital requirements primarily consist ofmaintenance capital expenditures and expansion capital expenditures.  Maintenance capital expenditures represent capitalexpenditures to repair or replace partially or fully depreciated assets tomaintain the operating capacity of, or revenues generated by, existing assetsand 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 $3.6 million and $1.4 million in maintenance capitalexpenditures for the nine months ended September 30, 2009 and 2008,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 generally fund our expansion capitalexpenditures through our cash generated from operations or our acquisition andworking capital revolving credit facilities or by issuing additionalequity.  We had approximately$4.4 million and $6.9 million in expansion capital expenditures forthe nine months ended September 30, 2009 and 2008, respectively, toincrease our operating capacity and capabilities.  Specifically, for the nine months ended September 30,2009, expansion capital expenditures consisted of approximately$3.2 million in costs related to dock expansion and bringing formerlyout-of-permit tanks back online at the Albany, New York terminal,$0.9 million in additional terminal equipment at the Providence, RhodeIsland terminal, $0.2 million in automation costs at our recently leasedstorage facility in Long Island, New York and $0.1 million in otherexpansion capital expenditures. Comparatively, for the nine months ended September 30, 2008,expansion capital expenditures included $4.9 million in expendituresrelated to construction in process on our leased terminal in Providence, RhodeIsland, $1.1 million related to conversion expenditures to handleethanol-based gasoline and $0.9 million in other expansion capitalexpenditures.

 

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.

 

41

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*** ***

***CashFlow***

*** ***

Thefollowing table summarizes cash flow activity (in thousands):

 
| ** **                                | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net cash provided by operating activities |       | $                      | 25,778     |   | $ | 54,124 |   |
| Net cash used in investing activities     |       | $                      | (8,022     | ) | $ | (8,288 | ) |
| Net cash used in financing activities     |       | $                      | (18,017    | ) | $ | (47,341 | ) |

 

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

 

Netcash provided by operating activities was $25.8 million for the ninemonths ended September 30, 2009 compared to net cash provided by operatingactivities of $54.1 million for the nine months ended September 30,2008.

 

Duringthe nine months ended September 30, 2009, refined petroleum product andnatural gas prices declined significantly compared to the same period in 2008,causing the carrying values of our accounts receivable and accounts payable forthe nine months ended September 30, 2009 to be less than the carryingvalues we experienced for the nine months ended September 30, 2008.  As a result, for the nine months ended September 30,2009, we had decreases of $53.9 million and $54.0 million in accountsreceivable and accounts payable, respectively, while, we had decreases of$125.0 million, $89.7 million and $78.5 million in inventories,accounts receivable and accounts payable, respectively, for the nine monthsended September 30, 2008.  Due to favorable market conditions, weelected to use our storage capacity to carry increased inventories ofapproximately $180.0 million for the nine months ended September 30,2009.  Through the use of regulatedexchanges or derivatives, we maintain a position that is substantially hedgedwith respect to such inventories.

 

Thecash provided by operating activities is also reflected in the year-over-yearincrease in net income of $13.5 million and a $248.6 million changein the fair value of our forward fixed price contracts.  For the nine months ended September 30,2009, contracts supporting our forward fixed price hedge program provided fundsfrom the NYMEX of approximately$162.0 million while for the nine months ended September 30, 2008similar hedging activity required margin payments of approximately$86.6 million to the NYMEX due tomarket direction.

 

Netcash used in investing activities was 8.0 million for the nine monthsended September 30, 2009 compared to the same period in 2008 and included$3.6 million in maintenance capital expenditures and $4.4 million inexpansion capital expenditures ($3.2 million in costs related to dockexpansion and bringing formerly out-of-permit tanks back online at the Albany,New York terminal, $0.9 million in additional terminal equipment at theProvidence, Rhode Island terminal, $0.2 million in automation costs at ourrecently leased storage facility in Long Island, New York and $0.1 millionin other expansion capital expenditures). Comparatively, for the nine months ended September 30, 2008, netcash used in investing activities included $8.3 million in total capitalexpenditures comprised of $1.4 million in maintenance capital expendituresand $6.9 million in expansion capital expenditures ($4.9 millionrelated to construction in process on our leased terminal in Providence, RhodeIsland, $1.1 million related to conversion expenditures to handleethanol-based gasoline and $0.9 million in other expansion capitalexpenditures).

 

Netcash used in financing activities was $18.0 million for the nine monthsended September 30, 2009 and primarily included $19.6 million in cashdistributions to our common and subordinated unitholders and our generalpartner, $3.5 million in the repurchases of common units held on ourbehalf pursuant to our Repurchase Program and for future satisfaction of our General Partner’sObligations (as defined in Note 12of Notes to Consolidated Financial Statements) and $0.3 millionrepurchased units held for tax obligations, offset by $5.4 million in netproceeds from our credit facilities. Comparatively, for the nine months ended September 30, 2008, netcash used in financing activities included net payments on our creditfacilities of $26.5 million, $19.6 million in cash distributions toour common and subordinated unitholders and our general partner and$1.2 million in payments on our note payable.

 

42

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***Credit Agreement***

 

We,our general partner, our operating company and our operating subsidiaries havea four-year senior secured credit agreement with total available commitments of$750.0 million.  We repay amountsoutstanding and reborrow funds based on our working capital requirements and,therefore, classify as a current liability the portion of the working capitalrevolving credit facility we expect to pay down during the course of theyear.  The long-term portion of theworking capital revolving credit facility is the amount we expect to beoutstanding during the entire year.  Thecredit agreement will mature 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 $650.0 million; the $650.0 million includestwo $50.0 million seasonal overline facilities that are available eachyear only during the period between September 1 and June 30;

 

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

 

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

 

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 $200.0 million, for atotal working capital revolving credit facility of up to $850.0 million.  Any such request for an increase by us mustbe in a minimum amount of $5.0 million, and no more than three suchrequests may be made for each facility. We, however, cannot provide assurance that our lending group will agreeto fund any request by us for additional amounts in excess of the totalavailable commitments of $750.0** **million.

 

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 deteriorating 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.

 

Duringthe period from January 1, 2008 through July 20, 2008, borrowingsunder our working capital revolving credit, acquisition and revolving creditfacilities bore interest at our option at (1) the Eurodollar rate, plus1%, 11⁄2% and 11⁄2%, respectively, (2) the cost of funds rate, plus 1%, 13⁄4%and 11⁄2%, respectively, or (3) the bank’s base rate.  Commencing July 21, 2008, borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio (as defined in the credit agreement). Commencing July 21, 2008, 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,which in turn depends upon the Combined Interest Coverage Ratio.  The average interest rateswere approximately 3.5% and 4.5% for the three months ended September 30, 2009and 2008, respectively, and 3.7% and 4.3% for the nine months ended September 30,2009 and 2008, 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 September 30, 2009, we had total borrowings outstanding under ourcredit agreement of $438.9 million, including $71.2 millionoutstanding on our acquisition facility, and outstanding letters of credit of$64.5 million.  The total remainingavailability for borrowings and letters of credit at September 30, 2009and December 31, 2008 was $246.6 million and $211.3 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.  We were in compliance with theforegoing covenants at September 30, 2009. 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 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.  We have complied with this provision for theyear ending December 31, 2009.  Itis anticipated that the seasonal decrease in working capital as we exit ourheating season will contribute to a decrease in borrowings outstanding underour 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.  We have complied with this provision for theyear ending December 31, 2009.

 

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; and Calyon New York Branch.

 

***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, 2008. There have been no subsequent changes in these policies and estimatesthat had a significant impact on our financial condition and results ofoperations for the periods covered in this report.

 

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**RecentAccounting Pronouncements**

 

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

 

**Item 3.        Quantitative and 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 tomanage exposure to interest rate risk and various derivative instruments tomanage 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 facility. Therefore, from time to time, we utilize interest rate collars to hedgeinterest obligations on specific and anticipated debt issuances.

 

Duringthe period from January 1, 2008 through July 20, 2008, borrowingsunder our working capital revolving credit, acquisition credit and revolvingcredit facilities bore interest at our option at (1) the Eurodollar rate,plus 1%, 11⁄2% and 11⁄2 %, respectively, (2) the cost of funds rate, plus 1%,13⁄4% and 11⁄2 %, respectively, or (3) the bank’s base rate.  Commencing July 21, 2008, borrowings under the working capitalrevolving credit facility bear interest at (1) the Eurodollar rate plus1.75% to 2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) thebase rate plus 0.75% to 1.25%, each depending on the pricing level provided inthe credit agreement, which in turn depends upon the Combined Interest CoverageRatio (as defined in the credit agreement). Commencing July 21, 2008, 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,which in turn depends upon the Combined Interest Coverage Ratio.  The average interest rateswere approximately 3.5% and 4.5% for the three months ended September 30,2009 and 2008, respectively, and 3.7% and 4.3% for the nine months ended September 30,2009 and 2008, respectively.

 

Asof September 30, 2009, we had total borrowings outstanding under thecredit agreement of $438.9 million. The impact of a 1% increase in the interest rate on this amount of debtwould have resulted in an increase in interest expense, and a correspondingdecrease in our results of operations, of approximately $4.4 millionannually, assuming, however, that our indebtedness remained constant throughoutthe year.

 

We executed two zero premiuminterest rate collars with major financial institutions.  Each collar is designated as a cash flowhedge and accounted for in accordance with the guidance issued by the FinancialAccounting Standards Board.  The firstcollar, which became effective on May 14, 2007 and expires on May 14,2011, is used to hedge the variability in interest payments due to changes inthe three-month LIBOR rate with respect to $100.0 million of three-month LIBOR-based borrowings.  Under the first collar, we capped ourexposure at a maximum three-month LIBOR rate of 5.75% and established a minimumfloor rate of 3.75%.  Whenever thethree-month LIBOR rate is greater than the cap, we receive from the respectivefinancial institution the difference between the cap and the currentthree-month LIBOR rate on the $100.0 million of three-month LIBOR-based borrowings.  Conversely, whenever the three-month LIBORrate is lower than the floor, we remit to the respective financial institutionthe difference between the floor and the current three-month LIBOR rate on the$100.0 millionof three-month LIBOR-based borrowings. As of September 30, 2009, the three-month LIBOR rateof 0.45% was lower than the floor rate. As a result, in November 2009, we will remit to the respectivefinancial institution the difference between the floor rate and the currentrate which amounted to approximately $440,000.

 

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 

 

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difference between the floor andthe current one-month LIBOR rate on the $100.0 million of one-month LIBOR-based borrowings.  As of September 30, 2009, theone-month LIBOR rate of 0.26% was lower than the floor rate.  As a result, in October 2009, weremitted to the respective financial institution the difference between thefloor rate and the current rate which amounted to approximately $196,700.  SeeNote 5 of Notesto Consolidated Financial Statements for further discussion on the interestrate collars.

 

***Commodity Risk***

 

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

 

Whilewe seek to maintain a position that is substantially balanced within ourproduct purchase activities, we may experience net unbalanced positions forshort periods of time as a result of variances in daily sales andtransportation and delivery schedules as well as logistical issues associatedwith inclement weather conditions.  Inconnection with managing these positions and maintaining a constant presence inthe marketplace, both necessary for our business, we engage in a controlledtrading program for up to an aggregate of 250,000 barrels of refined petroleumproducts 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 refined petroleumproducts.  Any hedge ineffectiveness isreflected in our results of operations. We utilize the NYMEX, which is a regulated exchange for energy productsthat it trades, thereby reducing potential delivery and supply risks.  Generally, our practice is to close all NYMEXpositions rather than to make or receive physical deliveries.  With respect to other energy products, weenter into derivative agreements with counterparties that we believe have astrong credit profile, in order to hedge market fluctuations and/or lock-inmargins relative to our commitments.

 

AtSeptember 30, 2009, the fair value of all of our commodity risk derivativeinstruments and the change in fair value that would be expected from a 10%price increase or decrease are shown in the table below (in thousands):

 

Gain (loss):

 

| ** **                     | ** ** | **Fair  Value at  September 30,  2009** | ** ** | **Effect  of 10%****Price Increase** | ** ** | **Effect  of 10%****Price Decrease** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| NYMEX contracts                |       | $                                            | (14,279    | )                                    | $          | (29,950                              | )          | $ | 29,950 |   |
| Swaps, options and other,  net |       | (279                                         | )          | (1,395                               | )          | (2,680                               | )          |
|                           |       | $                                            | (14,558    | )                                    | $          | (31,345                              | )          | $ | 27,270 |   |

 

Thefair values of the futures contracts are based on quoted market prices obtainedfrom the NYMEX.  The fair value of theswaps and option contracts are estimated based on quoted prices from varioussources such as independent reporting services, industry publications andbrokers.  These quotes are compared tothe contract price of the swap, which approximates the gain or loss that wouldhave been realized if the contracts had been closed out at September 30,2009.  For positions where independentquotations are not available, an estimate is provided, or the prevailing marketprice at which the positions could be liquidated is used.  All hedge positions offset physical exposuresto the spot market; none of these offsetting physical exposures are included inthe above table.  Price-risksensitivities were calculated by assuming an across-the-board 10% increase ordecrease in price regardless of term or historical relationships between the contractualprice of the instruments and the underlying commodity price.  In the event of an actual 10% change inprompt month prices, the fair value of our derivative portfolio would typicallychange less than that shown in the table due to lower volatility in out-monthprices.  We have a daily marginrequirement to maintain a cash deposit with our broker based on the prior day’smarket results on open futures contracts. The balance of this deposit will fluctuate based on our open marketpositions and the commodity exchange’s requirements.  The required brokerage margin balance was$5 thousand at September 30, 2009.

 

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

 

**Item 4.        Controls and Procedures**

 

***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 September 30,2009.

 

***Internal Control over Financial Reporting***

 

There has not been any change in our internal control over financialreporting that occurred during the quarter ended September 30, 2009 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

***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 in our Annual Report on Form 10-K for the yearended December 31,2008 and in Note 11 in this Quarterly Report on Form 10-Q, weare not aware of any significant legal or governmental proceedings against us,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.

 

On October 22, 2009,the Federal Trade Commission (“FTC”) issued a Civil Investigative Demand and a SubpoenaDuces Tecum in connection with the FTC’s regulatory review of the Partnership’splanned acquisition of three refined petroleum terminal facilities in Newburgh,New York from Warex Terminals Corporation. The Partnership will continue to cooperate with the FTC during itsreview.  The Partnership cannot predictthe outcome of the FTC’s review or its effect on the transaction.  As a result of the FTC review, closing of thetransaction will not be completed in 2009 and remains subject to the FTC review,receipt of certain regulatory approvals and various other customary closingconditions.

 

**Item 1A.     Risk Factors**

 

Therehave been no material changes to the Risk Factors disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

**Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds**

 

***Issuer Purchases of Equity Securities***

 

Thetable below provides information with respect to purchases of our common unitsmade by our general partner on our behalf during the quarter ended September 30,2009:

 
| ** **                                      | ** ** | ** **        | ** ** | ** **        | ** ** | ** **                 | ** ** | **Maximum  Number (or**       | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | ** **        | ** ** | ** **        | ** ** | **Total  Number of**       | ** ** | **Approximate  Dollar**       | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** **        | ** ** | **Units  Purchased as**    | ** ** | **Value)  of Units That May** | ** ** |
| ** **                                      | ** ** | **Total  Number** | ** ** | **Average**       | ** ** | **Part of  Publicly** | ** ** | **Yet Be  Purchased**         | ** ** |
| ** **                                      | ** ** | **Of Units**      | ** ** | **Price  Paid**   | ** ** | **Announced  Plans or**    | ** ** | **Under  the Plans or**       | ** ** |
| **Period**                                      | ** ** | **Purchased**     | ** ** | **Per Unit  ($)** | ** ** | **Programs(1)**            | ** ** | **Programs(1)**               | ** ** |
| July 1 – July 31, 2009           |       | 28,025            |       | 17.91             |       | 28,025                     |       | —                        |       |
| August 1 – August 31, 2009       |       | 39,691            |       | 21.86             |       | 39,691                     |       | —                        |       |
| September 1 – September 30, 2009 |       | 29,700            |       | 23.06             |       | 29,700                     |       | —                        |       |

 

(1)    On May 7,2009, the board of directors of our general partner announced that itauthorized the repurchase of our common units for the purpose ofassisting us in meeting our general partner’s anticipated obligations todeliver common units under the LTIP and meeting the general partner’sobligations under existing employment agreements and other employment relatedobligations of the general partner.  Weare authorized to spend up to $6.6 million to acquire up to 445,000of our common units in the aggregate, over an extended period of time,consistent with the general partner’s obligations under the LTIP and employmentagreements.  Common units may berepurchased from time to time in open market transactions, including block purchases,or in privately negotiated transactions. Such authorized unit repurchases may be modified, suspended orterminated at any time, and are subject to price, economic and marketconditions, applicable legal requirements and available liquidity.

 

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| **Item 6.** | **Exhibits** |
|-------------|--------------|
|        |         |   |   |
| 3.1         |         | — | Second Amended and  Restated Agreement of Limited Partnership of Global Partners LP dated as of  May 9, 2007 (incorporated herein by reference to Exhibit 3.1 to the  Current Report on Form 8-K filed on May 10, 2007). |
|        |         |   |   |
| 3.2         |         | — | Amendment No. 1 to  the Second Amended and Restated Agreement of Limited Partnership of Global  Partners LP dated April 14, 2008 (incorporated herein by reference to  Exhibit 3.1 to the Current Report on Form 8-K filed on  April 17, 2008). |
|        |         |   |   |
| 31.1        |         | — | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer of  Global GP LLC, general partner of Global Partners LP. |
|        |         |   |   |
| 31.2        |         | — | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of  Global GP LLC, general partner of Global Partners LP. |
|        |         |   |   |
| 32.1        | †       | — | Section 1350  Certification of Chief Executive Officer of Global GP LLC, general partner of Global Partners  LP. |
|        |         |   |   |
| 32.2        | †       | — | Section 1350  Certification of Chief Financial Officer of Global GP LLC, general partner of Global Partners  LP. |

 

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** **

**†****                     **Not deemed “filed” for purposes 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: November 6, 2009 |                   | By: | /s/ Eric Slifka |
|                         |                   |   | Eric Slifka |
|                         |                   |   | President and Chief Executive Officer |
|                         |                   |   | (Principal Executive Officer) |
|                         |                   |   |   |
|                         |                   |   |   |
| Dated: November 6, 2009 |                   | By: | /s/ Thomas J. Hollister |
|                         |                   |   | Thomas J. Hollister |
|                         |                   |   | Chief Operating Officer and Chief Financial Officer |
|                         |                   |   | (Principal Financial Officer) |

 

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**INDEX TO EXHIBITS**

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