Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

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

 

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

 

**Global Partners LP**

(Exactname of registrant as specified in its charter)

 

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

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past90 days.   Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Date File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files.   Yes o No o

 

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

 

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

 

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

 

The issuer had 7,428,139 common units and 5,642,424subordinated units outstanding as of August 4, 2009.

 

 

 

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Table of Contents

 

**TABLE OFCONTENTS**

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

 

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Table of Contents

 

**Item 1.    FinancialStatements**

 

**GLOBAL PARTNERS LP**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                    |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                          |       | $                 | 2,962      |                  | $          | 945 |   |
| Accounts receivable, net                                                                                                                                           |       | 190,621           |       | 249,418               |       |
| Accounts receivable—affiliates                                                                                                                                |       | 1,071             |       | 2,518                 |       |
| Inventories                                                                                                                                                        |       | 369,353           |       | 240,346               |       |
| Brokerage margin deposits                                                                                                                                          |       | 25,863            |       | 8,991                 |       |
| Fair value of forward fixed price contracts                                                                                                                        |       | 8,598             |       | 161,787               |       |
| Prepaid expenses and other current assets                                                                                                                          |       | 31,570            |       | 29,302                |       |
| Total current assets                                                                                                                                               |       | 630,038           |       | 693,307               |       |
| Property and equipment, net                                                                                                                                        |       | 162,434           |       | 161,988               |       |
| Intangible assets, net                                                                                                                                             |       | 29,939            |       | 31,403                |       |
| Other assets                                                                                                                                                       |       | 3,158             |       | 2,564                 |       |
| Total assets                                                                                                                                                       |       | $                 | 825,569    |                  | $          | 889,262 |   |
| ** **                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities and partners’  equity**                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                   |       | $                 | 132,223    |                  | $          | 219,783 |   |
| Working capital revolving credit facility—current  portion                                                                                                    |       | 135,814           |       | 208,210               |       |
| Environmental liabilities—current portion                                                                                                                     |       | 3,296             |       | 4,191                 |       |
| Accrued expenses and other current liabilities                                                                                                                     |       | 63,776            |       | 54,054                |       |
| Income taxes payable                                                                                                                                               |       | —            |       | 520                   |       |
| Obligations on forward fixed price contracts                                                                                                                       |       | 14,300            |       | 7,954                 |       |
| Total current liabilities                                                                                                                                          |       | 349,409           |       | 494,712               |       |
| Working capital revolving credit facility—less  current portion                                                                                               |       | 228,986           |       | 154,090               |       |
| Acquisition facility                                                                                                                                               |       | 71,200            |       | 71,200                |       |
| Environmental liabilities—less current portion                                                                                                                |       | 2,314             |       | 2,377                 |       |
| Accrued pension benefit cost                                                                                                                                       |       | 9,103             |       | 8,853                 |       |
| Deferred compensation                                                                                                                                              |       | 1,752             |       | 1,663                 |       |
| Other long-term liabilities                                                                                                                                        |       | 9,294             |       | 12,899                |       |
| Total liabilities                                                                                                                                                  |       | 672,058           |       | 745,794               |       |
| ** **                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Partners’ equity**                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common unitholders (7,428,139 units issued and  7,367,781 outstanding at June 30, 2009 and 7,428,139 units issued and  outstanding at December 31, 2008) |       | 166,335           |       | 163,092               |       |
| Subordinated unitholders (5,642,424 units issued  and outstanding at June 30, 2009 and December 31, 2008)                                                |       | (1,274            | )          | (4,189                | )          |
| General partner interest (1.73% interest with  230,303 equivalent units outstanding at June 30, 2009 and  December 31, 2008)                             |       | (53               | )          | (172                  | )          |
| Accumulated other comprehensive loss                                                                                                                               |       | (11,497           | )          | (15,263               | )          |
| Total partners’ equity                                                                                                                                        |       | 153,511           |       | 143,468               |       |
| Total liabilities and partners’ equity                                                                                                                        |       | $                 | 825,569    |                  | $          | 889,262 |   |

 

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

 

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Sales                                                                                         |       | $                                     | 1,201,149  |                                | $          | 2,297,709 |   | $ | 2,834,104 |   | $ | 5,018,701 |   |
| Cost of sales                                                                                 |       | 1,173,360                             |       | 2,275,036                           |       | 2,755,601 |   | 4,960,412 |   |
| Gross profit                                                                                  |       | 27,789                                |       | 22,673                              |       | 78,503 |   | 58,289 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Costs and operating  expenses:                                                                |       |                                  |       |                                |       |   |   |   |   |
| Selling, general and  administrative expenses                                                 |       | 13,299                                |       | 10,182                              |       | 31,374 |   | 21,255 |   |
| Operating expenses                                                                            |       | 9,137                                 |       | 8,771                               |       | 17,612 |   | 17,796 |   |
| Amortization expenses                                                                         |       | 803                                   |       | 737                                 |       | 1,603 |   | 1,461 |   |
| Total costs and operating  expenses                                                           |       | 23,239                                |       | 19,690                              |       | 50,589 |   | 40,512 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Operating income                                                                              |       | 4,550                                 |       | 2,983                               |       | 27,914 |   | 17,777 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Interest expense                                                                              |       | (3,422                                | )          | (4,087                              | )          | (7,198 | ) | (10,117 | ) |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Income  (loss) before income tax expense                                                      |       | 1,128                                 |       | (1,104                              | )          | 20,716 |   | 7,660 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Income  tax expense                                                                           |       | (150                                  | )          | (150                                | )          | (875 | ) | (295 | ) |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                                                             |       | 978                                   |       | (1,254                              | )          | 19,841 |   | 7,365 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Less: General partner’s  interest in net income, including incentive distribution rights |       | (67                                   | )          | (28                                 | )          | (443 | ) | (227 | ) |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Limited partners’ interest  in net income (loss)                                         |       | $                                     | 911        |                                | $          | (1,282 | ) | $ | 19,398 |   | $ | 7,138 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic net income (loss)  per limited partner unit                                             |       | $                                     | 0.07       |                                | $          | (0.10 | ) | $ | 1.48 |   | $ | 0.55 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted net income (loss)  per limited partner unit                                           |       | $                                     | 0.07       |                                | $          | (0.10 | ) | $ | 1.46 |   | $ | 0.55 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic weighted average  limited partner units outstanding                                     |       | 13,059                                |       | 13,071                              |       | 13,065 |   | 13,071 |   |
|                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted weighted average  limited partner units outstanding                                   |       | 13,356                                |       | 13,071                              |       | 13,273 |   | 13,071 |   |

 

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

 

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**GLOBAL PARTNERS LP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                                                                   |       |                                | * *   |   | * * |
| **Cash flows from operating  activities**                                                    |       |                                |       |   |   |
| Net income                                                                                   |       | $                                   | 19,841     |   | $ | 7,365 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation and  amortization                                                               |       | 7,460                               |       | 7,111 |   |
| Amortization of deferred  financing fees                                                     |       | 578                                 |       | 381 |   |
| Loss on disposition of  property and equipment and other                                     |       | —                              |       | 6 |   |
| Bad debt expense                                                                             |       | 1,155                               |       | 60 |   |
| Stock-based compensation  expense                                                            |       | 917                                 |       | 390 |   |
| Changes in operating  assets and liabilities:                                                |       |                                |       |   |   |
| Accounts receivable                                                                          |       | 57,642                              |       | 37,071 |   |
| Accounts receivable –  affiliate                                                        |       | 1,447                               |       | (890 | ) |
| Inventories                                                                                  |       | (129,007                            | )          | (3,153 | ) |
| Broker margin deposits                                                                       |       | (16,872                             | )          | (2,941 | ) |
| Prepaid expenses, all  other current assets and other assets                                 |       | (3,520                              | )          | (5,442 | ) |
| Accounts payable                                                                             |       | (87,559                             | )          | (40,359 | ) |
| Income taxes payable                                                                         |       | (578                                | )          | 109 |   |
| Change in fair value of forward fixed price  contracts                                       |       | 159,535                             |       | (7,491 | ) |
| Accrued expenses and all  other current liabilities                                          |       | 9,142                               |       | 1,810 |   |
| Net cash provided by (used  in) operating activities                                         |       | 20,181                              |       | (5,973 | ) |
| ** **                                                                                   |       |                                |       |   |   |
| **Cash flows from investing  activities**                                                    |       |                                |       |   |   |
| Capital expenditures                                                                         |       | (6,303                              | )          | (5,523 | ) |
| Proceeds from sale of  property and equipment                                                |       | —                              |       | 13 |   |
| Net cash used in investing  activities                                                       |       | (6,303                              | )          | (5,510 | ) |
| ** **                                                                                   |       |                                |       |   |   |
| **Cash flows from financing  activities**                                                    |       |                                |       |   |   |
| Proceeds from credit  facilities, net                                                        |       | 2,500                               |       | 26,100 |   |
| Payments on note payable,  other                                                             |       | —                              |       | (1,239 | ) |
| Repurchase of common units                                                                   |       | (1,293                              | )          | — |   |
| Distributions to partners                                                                    |       | (13,068                             | )          | (13,068 | ) |
| Net cash (used in)  provided by financing activities                                         |       | (11,861                             | )          | 11,793 |   |
|                                                                                         |       |                                |       |   |   |
| Increase in cash and cash  equivalents                                                       |       | 2,017                               |       | 310 |   |
| Cash and cash equivalents  at beginning of period                                            |       | 945                                 |       | 2,110 |   |
| Cash and cash equivalents  at end of period                                                  |       | $                                   | 2,962      |   | $ | 2,420 |   |
| ** **                                                                                   |       |                                |       |   |   |
| **Supplemental information**                                                                 |       |                                |       |   |   |
| Cash paid during the  period for interest                                                    |       | $                                   | 7,289      |   | $ | 10,320 |   |

* *

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

 

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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                      |       | 917             |       | —           |       | —       |       | —            |       | 917                |       |
| Phantom unit dividend                         |       | (8              | )          | —           |       | —       |       | —            |       | (8                 | )          |
| Distributions to partners                     |       | (7,242          | )          | (5,502           | )          | (324         | )          | —            |       | (13,068            | )          |
| Repurchase of common units                    |       | (1,405          | )          | —           |       | —       |       | —            |       | (1,405             | )          |
| Comprehensive income:                         |       |            |       |             |       |         |       |              |       |               |       |
| Net income                                    |       | 10,981          |       | 8,417            |       | 443          |       | —            |       | 19,841             |       |
| Other comprehensive income:                   |       |            |       |             |       |         |       |              |       |               |       |
| Change in fair value of interest rate collars |       | —          |       | —           |       | —       |       | 3,415             |       | 3,415              |       |
| Change in pension liability                   |       | —          |       | —           |       | —       |       | 351               |       | 351                |       |
| Total comprehensive income                    |       | —          |       | —           |       | —       |       | —            |       | 23,607             |       |
| **Balance at June 30, 2009**             |       | $               | 166,335    |             | $          | (1,274       | )          | $                 | (53        | )                  | $          | (11,497 | ) | $ | 153,511 |   |

 

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

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.**                      Organizationand Basis of Presentation

 

**Organization**

 

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

 

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 itspersonnel.  The General Partner andaffiliates of the General Partner, including its directors and executiveofficers, own 142,799 common units and 5,642,424 subordinated units,representing a combined 43.5% limited partner interest.

 

**Basis of Presentation**

 

***InterimFinancial Statements***

 

**The accompanyingconsolidated financial statements as of June 30, 2009 and December 31, 2008 and for the three and sixmonths ended June 30, 2009 and2008 reflect the accounts of the Partnership. All intercompany balances and transactions have been eliminated.**

** **

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”) andreflect all adjustments (consisting 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 andsix months ended June 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.

 

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

 
| ** **         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Distillate sales   |       | 35                                    | %          | 40                                  | %          | 51 | % | 50 | % |
| Gasoline sales     |       | 60                                    | %          | 56                                  | %          | 43 | % | 45 | % |
| Residual oil sales |       | 5                                     | %          | 4                                   | %          | 6 | % | 5 | % |
|               |       | 100                                   | %          | 100                                 | %          | 100 | % | 100 | % |

 

ThePartnership had one customer, ExxonMobil Oil Corporation (“ExxonMobil”), whoaccounted for approximately 25% and 23% of total sales for the three monthsended June 30,** **2009and 2008, respectively and approximately 19% and 20% of total sales for the sixmonths ended June 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(Loss) Per Limited Partner Unit

** **

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

 

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

 

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.  These declared cash distributions resulted inincentive distributions to the General Partner, as the holder of the incentivedistribution rights, as indicated above, and enabled the Partnership to reach itssecond target distribution with respect to such incentive distributionrights.  See Note 9, “CashDistributions” for further information.

 

6

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The following tableprovides a reconciliation of net income and the assumed allocation of net incometo the limited partners’ interest for purposes of computing net income per limitedpartner unit for the three and six months ended June 30, 2009 (inthousands, except per unit data):

 
| ** **                                                 | ** ** | **Three months ended June 30, 2009** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                                | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**                                 | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             |       |                                      |       |   |   |   |   |   |   |
| Net income                                                 |       | $                                         | 978        |   | $ | 911 |   | $ | 67 |   | $ | — |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                         | 6,534      |   | $ | 6,372 |   | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net income             |       | (5,556                                    | )          | (5,461 | ) | (95 | ) | — |   |
| Assumed allocation of net income                           |       | $                                         | 978        |   | $ | 911 |   | $ | 17 |   | $ | 50 |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| **Denominator:**                                           |       |                                      |       |   |   |   |   |   |   |
| Basic weighted average limited partner units outstanding   |       |                                      |       | 13,059 |   |   |   |   |   |
| Dilutive effect of phantom units                           |       |                                      |       | 297 |   |   |   |   |   |
| Diluted weighted average limited partner units outstanding |       |                                      |       | 13,356 |   |   |   |   |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                  |       |                                      |       | $ | 0.07 |   |   |   |   |   |
| Diluted net income per limited partner unit                |       |                                      |       | $ | 0.07 |   |   |   |   |   |

 
| ** **                                                 | ** ** | **Six months ended June 30, 2009** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | ** **                              | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**                               | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                 |       | $                                       | 19,841     |   | $ | 19,398 |   | $ | 443 |   | $ | — |   |
|                                                       |       |                                    |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                       | 13,068     |   | $ | 12,744 |   | $ | 224 |   | $ | 100 |   |
| Assumed allocation of undistributed net income             |       | 6,773                                   |       | 6,654 |   | 119 |   | — |   |
| Assumed allocation of net income                           |       | $                                       | 19,841     |   | $ | 19,398 |   | $ | 343 |   | $ | 100 |   |
|                                                       |       |                                    |       |   |   |   |   |   |   |
| **Denominator:**                                           |       |                                    |       |   |   |   |   |   |   |
| Basic weighted average limited partner units outstanding   |       |                                    |       | 13,065 |   |   |   |   |   |
| Dilutive effect of phantom units                           |       |                                    |       | 208 |   |   |   |   |   |
| Diluted weighted average limited partner units outstanding |       |                                    |       | 13,273 |   |   |   |   |   |
|                                                       |       |                                    |       |   |   |   |   |   |   |
| Basic net income per limited partner unit                  |       |                                    |       | $ | 1.48 |   |   |   |   |   |
| Diluted net income per limited partner unit                |       |                                    |       | $ | 1.46 |   |   |   |   |   |

 

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

 

The Partnership appliedthe provisions of EITF No. 07-04 on a retroactive basis which had animmaterial impact on the limited partners’ interest in net (loss) income andnet (loss) income per limited partner unit for the three and six months ended June 30,2008.

 

7

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The following tableprovides a reconciliation of net (loss) income and the assumed allocation ofnet (loss) income to the limited partners’ interest for purposes of computing net income perlimited partner unit for the three and six months ended June 30, 2008 (inthousands, except per unit data):

 
| ** **                                                 | ** ** | **Three months ended June 30, 2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                                | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**                                 | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                   |       | $                                         | (1,254     | ) | $ | (1,282 | ) | $ | 28 |   | $ | — |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                         | 6,534      |   | $ | 6,372 |   | $ | 112 |   | $ | 50 |   |
| Assumed allocation of undistributed net loss               |       | (7,788                                    | )          | (7,654 | ) | (134 | ) | — |   |
| Assumed allocation of net loss                             |       | $                                         | (1,254     | ) | $ | (1,282 | ) | $ | (22 | ) | $ | 50 |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| **Denominator:**                                           |       |                                      |       |   |   |   |   |   |   |
| Basic weighted average limited partner units outstanding   |       |                                      |       | 13,071 |   |   |   |   |   |
| Diluted weighted average limited partner units outstanding |       |                                      |       | 13,071 |   |   |   |   |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |
| Basic net loss per limited partner unit                    |       |                                      |       | $ | (0.10 | ) |   |   |   |   |
| Diluted net loss per limited partner unit                  |       |                                      |       | $ | (0.10 | ) |   |   |   |   |

 
| ** **                                                 | ** ** | **Six months ended June 30, 2008** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | ** **                              | ** ** | **Limited** | ** ** | **General Partner Interest** | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | **Partner** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Total**                               | ** ** | **Interest** | ** ** | **Partner** | ** ** | **IDRs** | ** ** |
| **Numerator:**                                             | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                 |       | $                                       | 7,365      |   | $ | 7,138 |   | $ | 227 |   | $ | — |   |
|                                                       |       |                                    |       |   |   |   |   |   |   |
| Declared distribution                                      |       | $                                       | 13,068     |   | $ | 12,744 |   | $ | 224 |   | $ | 100 |   |
| Assumed allocation of undistributed net income             |       | (5,703                                  | )          | (5,606 | ) | (97 | ) | — |   |
| Assumed allocation of net income                           |       | $                                       | 7,365      |   | $ | 7,138 |   | $ | 127 |   | $ | 100 |   |
|                                                       |       |                                    |       |   |   |   |   |   |   |
| **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                  |       |                                    |       | $ | 0.55 |   |   |   |   |   |
| Diluted net income per limited partner unit                |       |                                    |       | $ | 0.55 |   |   |   |   |   |

 

8

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Table of Contents

 

**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** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                             |       | $                      | 978        |                 | $          | (1,254 | ) | $ | 19,841 |   | $ | 7,365 |   |
| Change in fair value of interest rate collars |       | 2,263                  |       | 2,280                |       | 3,415 |   | (116 | ) |
| Change in pension liability                   |       | 593                    |       | (217                 | )          | 351 |   | (781 | ) |
| Total comprehensive income                    |       | $                      | 3,834      |                 | $          | 809 |   | $ | 23,607 |   | $ | 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):

 
| ** **                                          | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Distillates: home heating  oil, diesel and kerosene |       | $                       | 251,553    |                        | $          | 160,000 |   |
| Residual oil                                        |       | 31,003                  |       | 24,878                      |       |
| Gasoline                                            |       | 69,644                  |       | 40,183                      |       |
| Blend stock                                         |       | 17,153                  |       | 15,285                      |       |
| Total                                               |       | $                       | 369,353    |                        | $          | 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 $21.8 million and $14.8 millionat June 30, 2009 and December 31, 2008, respectively.  Negative exchange balances are accounted foras accounts payable and amounted to $11.5 million and $8.4 million atJune 30, 2009 and December 31, 2008, respectively.  Exchange transactions are valued usingcurrent quoted market prices.

 

**Note 5.**                      DerivativeFinancial Instruments

** **

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

** **

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

 

9

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

** **
| ** **            | ** ** | **Units(1)** | ** ** | **Unit of Measure**   | ** **            |
|-----------------------|------------|--------------|------------|-----------------------|-----------------------|
| Oil Contracts         |       |         |       |                  |                  |
| Long                  |       | 8,779        |       | Thousands  of barrels |                  |
| Short                 |       | (11,760      | )          | Thousands  of barrels |                  |
|                  |       |         |       |                  |                  |
| Natural Gas Contracts |       |         |       |                  |                  |
| Long                  |       | 19,962       |       | Decatherms            |                  |
| Short                 |       | (19,962      | )          | Decatherms            |                  |
|                  |       |         |       |                  |                  |
| Interest Rate Collars |       | $            | 200,000    |                  | Thousands  of dollars |   |
|                       |            |              |            |                       |                       |  |

 

----

**(1)**             Number of open positions and gross notional amountsdo not quantify risk or represent assets or liabilities of the Partnership, butare used in the calculation of cash 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 June 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 June 30, 2009.

 

10

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Thefollowing table presents the gross fair values of the Partnership’s derivativeinstruments and firm commitments and their location in the Partnership’sconsolidated balance sheets at June 30, 2009 and December 31, 2008(in thousands):

 
| ** **                                                            | ** ** | **Assets**                                       | ** ** | **Liabilities**   | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------|------------|
| ** **                                                            | ** ** | ** **                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **Derivatives Under**                                                 | ** ** | **Balance Sheet**                                | ** ** | **2009**          | ** ** | **2008** | ** ** | **Balance Sheet** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **SFAS No. 133**                                                 | ** ** | **Location**                                     | ** ** | **Fair Value**    | ** ** | **Fair Value** | ** ** | **Location** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
|                                                                  |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
| *Derivatives designated as hedging instruments and  firm commitments* |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
|                                                                  |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
| Oil  product contracts(1)                                             |       | (2)                                              |       | $                 | 60,311     |   | $ | 215,237 |   | (3) |   | $ | 68,762 |   | $ | 57,506 |   |
|                                                                  |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
| *Derivatives not designated as hedging instruments*                   |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
|                                                                  |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
| Oil  product contracts                                                |       | Accrued  expenses and  other current liabilities |       | 7,411             |       | 6,739 |   | Accrued  expenses and  other current liabilities |   | 7,491 |   | 6,799 |   |
|                                                                  |       |                                             |       |              |       |   |   |   |   |   |   |   |   |
| Total  derivatives                                                    |       |                                             |       | $                 | 67,772     |   | $ | 221,976 |   |   |   | $ | 76,253 |   | $ | 64,305 |   |

 

----

(1)             Includes forward fixed pricepurchase and sale contracts as recognized in the Partnership’s consolidatedbalance sheets at June 30, 2009 and December 31, 2008.

(2)             Fair value of forward fixedprice contracts, prepaid expenses and other current assets, accrued and othercurrent liabilities and obligations on forward fixed price contracts

(3)             Obligations on forward fixedprice 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 sixmonths ended June 30, 2009 and 2008 (in thousands):

 
| ** **            | ** ** | ** **        | ** ** | **Amount of Gain (Loss)** | ** ** | **Hedged**            | ** ** | **Location of**   | ** ** | **Amount of Gain (Loss)**                      | ** ** |
|-----------------------|------------|-------------------|------------|---------------------------|------------|-----------------------|------------|-------------------|------------|------------------------------------------------|------------|
| **Derivatives in**    | ** ** | **Location of**   | ** ** | **Recognized in Income**  | ** ** | **Items in**          | ** ** | **Gain (Loss)**   | ** ** | **Recognized in Income**                       | ** ** |
| **SFAS No. 133** | ** ** | **Gain (Loss)**   | ** ** | **on Derivatives**        | ** ** | **SFAS No. 133** | ** ** | **Recognized in** | ** ** | **on Hedged Items**                            | ** ** |
| **Fair Value**        | ** ** | **Recognized in** | ** ** | **Three Months Ended**    | ** ** | **Fair Value**        | ** ** | **Income on**     | ** ** | **Three Months Ended**                         | ** ** |
| **Hedging**           | ** ** | **Income on**     | ** ** | **June 30,**         | ** ** | **June 30,**     | ** ** | **Hedge**         | ** ** | **Related**                                    | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Relationship**      | ** ** | **Derivative**    | ** ** | **2009**                  | ** ** | **2008**              | ** ** | **Relationships** | ** ** | **Hedged Item**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |              |       |                      |       |                  |       |              |       |                                           |       |   |   |   |   |
| Oil product contracts |       | Cost of sales     |       | $                         | (99,378    | )                     | $          | (85,417           | )          | Inventories and forward fixed  price contracts |       | Cost of sales |   | $ | 99,699 |   | $ | 85,741 |   |
|                       |            |                   |            |                           |            |                       |            |                   |            |                                                |            |  |  |  |  |  |  |  |  |

 
| ** **            | ** ** | ** **        | ** ** | **Amount of Gain (Loss)** | ** ** | **Hedged**            | ** ** | **Location of**   | ** ** | **Amount of Gain (Loss)**                      | ** ** |
|-----------------------|------------|-------------------|------------|---------------------------|------------|-----------------------|------------|-------------------|------------|------------------------------------------------|------------|
| **Derivatives in**    | ** ** | **Location of**   | ** ** | **Recognized in Income**  | ** ** | **Items in**          | ** ** | **Gain (Loss)**   | ** ** | **Recognized in Income**                       | ** ** |
| **SFAS No. 133** | ** ** | **Gain (Loss)**   | ** ** | **on Derivatives**        | ** ** | **SFAS No. 133** | ** ** | **Recognized in** | ** ** | **on Hedged Items**                            | ** ** |
| **Fair Value**        | ** ** | **Recognized in** | ** ** | **Six Months Ended**      | ** ** | **Fair Value**        | ** ** | **Income on**     | ** ** | **Six Months Ended**                           | ** ** |
| **Hedging**           | ** ** | **Income on**     | ** ** | **June 30,**         | ** ** | **June 30,**     | ** ** | **Hedge**         | ** ** | **Related**                                    | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Relationship**      | ** ** | **Derivative**    | ** ** | **2009**                  | ** ** | **2008**              | ** ** | **Relationships** | ** ** | **Hedged Item**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |              |       |                      |       |                  |       |              |       |                                           |       |   |   |   |   |
| Oil product contracts |       | Cost of sales     |       | $                         | (199,602   | )                     | $          | (82,886           | )          | Inventories and forward fixed  price contracts |       | Cost of sales |   | $ | 200,247 |   | $ | 83,200 |   |
|                       |            |                   |            |                           |            |                       |            |                   |            |                                                |            |  |  |  |  |  |  |  |  |

 

11

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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):

 
| ** **             | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Futures contracts, net |       | $                       | (2,642     | )                           | $          | 138,741 |   |
| Swaps and other, net   |       | (3,060                  | )          | 15,092                      |       |
| Total                  |       | $                       | (5,702     | )                           | $          | 153,833 |   |

 

The total balances of$(5.7 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 June 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 these transactions,which establish an immediate margin, the Partnership seeks to maintain aposition that is substantially balanced between firm forward purchase and salescommitments.  Natural gas is generallypurchased and sold at fixed prices and quantities.  Current price quotes from actively tradedmarkets are used in all cases to determine the contracts’ fair value.  Changes in the fair value of these contractsare recognized in earnings as an increase or decrease in cost of sales.

 

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 $25.9 million and$9.0 million at June 30, 2009 and December 31, 2008,respectively.

 

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

 

12

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

***Cash Flow Hedges***

 

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

 

The Partnership executed two zeropremium interest rate collars with major financial institutions.  Each collar is designated as a cash flowhedge and accounted for under the provisions of SFAS No. 133.  The first collar, which became effective on May 14,2007 and expires on May 14, 2011, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. Under the first collar, the Partnership capped its exposure at a maximumthree-month LIBOR rate of 5.75% and established a minimum floor rate of 3.75%.  As of June 30, 2009, the three-monthLIBOR rate of 0.91% was lower than the floor rate.  As a result, in August 2009, thePartnership will remit to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$379,000 and, at June 30, 2009, was recorded in accrued expenses and othercurrent liabilities on the accompanying consolidated balance sheet.  Asof June 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 June 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 June 30, 2009, theone-month LIBOR rate of 0.32% was lower than the floor rate.  As a result, in July 2009, thePartnership remitted to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$192,000 and, at June 30, 2009, was recorded in accrued expenses and othercurrent liabilities on the accompanying consolidated balance sheet.  Asof June 30, 2009, the fair value of the second collar was a liability ofapproximately $3.0 millionand was recorded in both other long-term liabilities and accumulated othercomprehensive income 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 June 30, 2009.

 

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

 
| ** **                                       | ** ** | **Assets**        | ** ** | **Liabilities**   | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                       | ** ** | ** **        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **Derivatives Under**                            | ** ** | **Balance Sheet** | ** ** | **2009**          | ** ** | **2008** | ** ** | **Balance Sheet** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **SFAS No. 133**                            | ** ** | **Location**      | ** ** | **Fair Value**    | ** ** | **Fair Value** | ** ** | **Location** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
|                                             |       |              |       |              |       |   |   |   |   |   |   |   |   |
| *Derivatives designated as  hedging instruments* |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Interest rate collars                            |       |              |       | $                 | —     |   | $ | — |   | Other long-term liabilities |   | 7,431 |   | 10,846 |   |
|                                                  |            |                   |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

13

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Thefollowing table presents the amount of gains and losses from derivativesinvolved in cash flow hedging relationships recognized in the Partnership’sconsolidated statements of income for the three and six months ended June 30,2009 and 2008 (in thousands):

 
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **Recognized in Income**  | ** ** | ** **                   | ** ** | ** **        | ** ** | **Recognized in Income** | ** ** |
|--------------------------|------------|---------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **               | ** ** | ** **                | ** ** | ** **                   | ** ** | **on Derivatives**        | ** ** | ** **                   | ** ** | ** **        | ** ** | **on Derivatives**       | ** ** |
| ** **               | ** ** | **Amount of Gain (Loss)** | ** ** | **(Ineffectiveness Portion** | ** ** | **Amount of Gain (Loss)** | ** ** | **(Ineffectiveness Portion** | ** ** |
| ** **               | ** ** | **Recognized in Other**   | ** ** | **and Amount Excluded**      | ** ** | **Recognized in Other**   | ** ** | **and Amount Excluded**      | ** ** |
| ** **               | ** ** | **Comprehensive Income**  | ** ** | **from Effectiveness**       | ** ** | **Comprehensive Income**  | ** ** | **from Effectiveness**       | ** ** |
| **Derivatives in**       | ** ** | **on Derivatives**        | ** ** | **Testing)**                 | ** ** | **on Derivatives**        | ** ** | **Testing)**                 | ** ** |
| **SFAS No. 133**    | ** ** | **Three Months Ended**    | ** ** | **Three Months Ended**       | ** ** | **Six Months Ended**      | ** ** | **Six Months Ended**         | ** ** |
| **Cash Flow**            | ** ** | **June 30,**         | ** ** | **June 30,**            | ** ** | **June 30,**         | ** ** | **June 30,**            | ** ** | **June 30,** | ** ** | **June 30,**        | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Hedging Relationship** | ** ** | **2009**                  | ** ** | **2008**                     | ** ** | **2009**                  | ** ** | **2008**                     | ** ** | **2009**          | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                     |       |                      |       |                         |       |                      |       |                         |       |              |       |                     |       |   |   |   |   |
| Interest rate collars    |       | $                         | 2,264      |                         | $          | 2,280                     |       | $                            | —     |              | $          | —                   |       | $ | 3,416 |   | $ | (116 | ) | $ | — |   | $ | — |   |
|                          |            |                           |            |                              |            |                           |            |                              |            |                   |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Ineffectiveness relatedto the interest rate collars is recognized as interest expense and wasimmaterial at June 30, 2009.  Theeffective portion related to the interest rate collars that was originallyreported in other comprehensive income and reclassified to earnings was$1.3 million and $2.3 million for the three and six months ended June 30,2009, respectively.

 

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

 

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

 

Thefollowing table presents the amount of gains and losses from derivatives notinvolved in a SFAS No. 133 hedging relationships recognized in thePartnership’s consolidated statements of income for the three and six monthsended June 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**    | ** ** | **Six Months Ended**      | ** ** |
| **Derivatives Not Designated as Hedging** | ** ** | **Income on**     | ** ** | **June 30,**         | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Instruments Under SFAS No. 133**   | ** ** | **Derivatives**   | ** ** | **2009**                  | ** ** | **2008**                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                      |       |              |       |                      |       |                      |       |   |   |   |   |
| Oil product contracts                     |       | Cost  of sales    |       | $                         | 1,767      |                      | $          | (1,051 | ) | $ | 5,752 |   | $ | 4,503 |   |
|                                           |            |                   |            |                           |            |                           |            |  |  |  |  |  |  |  |  |

 

14

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**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 million revolving credit facility to be used for general purposes,including payment of distributions 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.

 

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

 

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

 

Commencing July 21, 2008, borrowings under the working capital revolvingcredit facility bear interest at (1) the Eurodollar rate plus 1.75% to2.25%, (2) the cost of funds rate plus 1.75% to 2.25%, or (3) 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 rate was approximately 3.8% for each of the three months ended June 30,2009 and 2008.  The average interestrates were approximately 3.8% and 4.2% for the six months ended June 30,2009 and 2008, respectively.

 

15

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 6.       Debt (continued)**

 

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 $229.0 million and $154.1 million at June 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 $135.8 million and$208.2 million at June 30, 2009 and December 31, 2008,respectively, representing the amounts the Partnership expects to pay downduring the course of the year.

 

Asof June 30, 2009, the Partnership had total borrowings outstanding underthe Credit Agreement of $436.0 million, including $71.2 millionoutstanding on the acquisition facility. In addition, the Partnership had outstanding letters of credit of$54.0 million.  The total remainingavailability for borrowings and letters of credit at June 30, 2009 and December 31,2008 was $260.0 million and $211.3 million, respectively.

 

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

 

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

 

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

 

16

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 6.       Debt (continued)**

 

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

 

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

 

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

** **

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

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                   |       | $                      | 325        |                 | $          | 266 |   | $ | 650 |   | $ | 531 |   |
| Interest cost                  |       | 228                    |       | 200                  |       | 457 |   | 400 |   |
| Expected return on plan assets |       | (160                   | )          | (165                 | )          | (321 | ) | (330 | ) |
| Recognized net actuarial loss  |       | 48                     |       | —               |       | 96 |   | — |   |
| Net periodic benefit cost      |       | $                      | 441        |                 | $          | 301 |   | $ | 882 |   | $ | 601 |   |

 

**Note 8.**                      Related PartyTransactions

** **

ThePartnership is a party to a Second Amended and Restated Terminal Storage Rentaland Throughput Agreement with Global Petroleum Corp. (“GPC”), an affiliate ofthe Partnership, which extends through December 2013 with annual renewaloptions thereafter.  The agreement isaccounted for as an operating lease.  Theexpenses under this agreement totaled approximately $2.1** **millionfor each of the three months ended June 30,****2009and 2008 and approximately $4.2** **millionfor each of the six months ended June 30,****2009and 2008.

 

Pursuantto an Amended and Restated Services Agreement with GPC, GPC provides certainterminal operating management services to the Partnership and uses certainadministrative, accounting and information processing services of thePartnership.  The expenses from theseservices totaled approximately $15,000 and $21,500 for the three months ended June 30,2009 and 2008, respectively, and approximately $36,500 and $43,000 for the sixmonths ended June 30, 2009 and 2008, respectively.  These charges were recorded in selling,general and administrative expenses in the accompanying consolidated statementsof operations.  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 June 30, 2009, no suchnotice of termination was given by either party.

 

17

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

** **

Pursuantto the Partnership’s Amended and Restated Services Agreement with AllianceEnergy LLC (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 $78,800 and $216,500 for the three months ended June 30,2009 and 2008, respectively, and $191,000 and $433,000 for the six months endedJune 30, 2009 and 2008, respectively. These fees were recorded as an offset to selling, general andadministrative expenses in the accompanying consolidated statements ofoperations.  The agreement extendsthrough January 1, 2010.

 

ThePartnership sells refined petroleum products to Alliance at prevailing marketprices at the time of delivery.  Sales toAlliance were approximately $3.9 million and $13.6 million for thethree months ended June 30, 2009 and 2008, respectively, and$6.6 million and $19.4 million for the six months ended June 30,2009 and 2008, respectively.

 

TheGeneral Partner employs substantially all of the Partnership’s employees andcharges the Partnership for their services. The expenses for the three months ended June 30, 2009 and 2008,including payroll, payroll taxes and bonus accruals, were $7.6 million and$6.7 million, respectively, and $19.9 million and $14.4 millionfor the six months ended June 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):

 
| ** **                               | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Receivables from Alliance                |       | $                       | 446        |                        | $          | 383 |   |
| Receivables from GPC                     |       | 222                     |       | 325                         |       |
| Receivables from the General Partner (1) |       | 403                     |       | 1,810                       |       |
| Total                                    |       | $                       | 1,071      |                        | $          | 2,518 |   |

 

----

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

 

18

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 9.**                      CashDistributions (continued)

 

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.

 

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 |   |

 

----

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

(2)         This distribution of $0.4875per unit resulted in the Partnership reaching its second target distributionfor the first quarter of 2009.  As aresult, the General Partner, as the holder of the IDRs received this additionalincentive distribution.

 

Inaddition, on July 23, 2009, the board of directors of the General Partnerdeclared a quarterly cash distribution of $0.4875 per unit for the period from April 1,2009 through June 30, 2009 ($1.95 per unit on an annualized basis).  On August 14, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business August 5, 2009.  Thisdistribution will result in the Partnership reaching its second targetdistribution for the quarter ended June 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 yearended December 31, 2008.

 

19

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Table of Contents

 

**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

 

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

 

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

 

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

 
| ** **                                  | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                  | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Wholesale Segment:**                      |       |                    |       |                  |       |   |   |   |   |
| Sales                                       |       |                    |       |                  |       |   |   |   |   |
| Distillates                                 |       | $                       | 405,060    |                  | $          | 883,577 |   | $ | 1,411,676 |   | $ | 2,486,987 |   |
| Gasoline                                    |       | 720,330                 |       | 1,283,676             |       | 1,221,989 |   | 2,258,744 |   |
| Residual oil                                |       | 5,853                   |       | 25,220                |       | 17,343 |   | 43,577 |   |
| Total                                       |       | $                       | 1,131,243  |                  | $          | 2,192,473 |   | $ | 2,651,008 |   | $ | 4,789,308 |   |
| Net product margin (1)                      |       |                    |       |                  |       |   |   |   |   |
| Distillates                                 |       | $                       | 13,477     |                  | $          | 9,329 |   | $ | 47,330 |   | $ | 32,421 |   |
| Gasoline                                    |       | 12,127                  |       | 10,424                |       | 23,913 |   | 18,968 |   |
| Residual oil                                |       | 2,294                   |       | 3,234                 |       | 5,114 |   | 7,130 |   |
| Total                                       |       | $                       | 27,898     |                  | $          | 22,987 |   | $ | 76,357 |   | $ | 58,519 |   |
| **Commercial Segment:**                     |       |                    |       |                  |       |   |   |   |   |
| Sales                                       |       | $                       | 69,906     |                  | $          | 105,236 |   | $ | 183,096 |   | $ | 229,393 |   |
| Net product margin (1)                      |       | $                       | 2,596      |                  | $          | 2,323 |   | $ | 7,524 |   | $ | 4,929 |   |
| **Combined sales and net product  margin:** |       |                    |       |                  |       |   |   |   |   |
| Sales                                       |       | $                       | 1,201,149  |                  | $          | 2,297,709 |   | $ | 2,834,104 |   | $ | 5,018,701 |   |
| Net product margin (1)                      |       | $                       | 30,494     |                  | $          | 25,310 |   | $ | 83,881 |   | $ | 63,448 |   |
| Depreciation allocated to  cost of sales    |       | 2,705                   |       | 2,637                 |       | 5,378 |   | 5,159 |   |
| **Combined gross profit**                   |       | $                       | 27,789     |                  | $          | 22,673 |   | $ | 78,503 |   | $ | 58,289 |   |

 

----

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

 

20

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

 
| ** **                                                              | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                                              | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Combined gross profit**                                               |       | $                       | 27,789     |                  | $          | 22,673 |   | $ | 78,503 |   | $ | 58,289 |   |
| **Operating costs and expenses  not allocated to reportable segments:** |       |                    |       |                  |       |   |   |   |   |
| Selling, general and  administrative expenses                           |       | 13,299                  |       | 10,182                |       | 31,374 |   | 21,255 |   |
| Operating expenses                                                      |       | 9,137                   |       | 8,771                 |       | 17,612 |   | 17,796 |   |
| Amortization expenses                                                   |       | 803                     |       | 737                   |       | 1,603 |   | 1,461 |   |
| **Total operating costs and  expenses**                                 |       | 23,239                  |       | 19,690                |       | 50,589 |   | 40,512 |   |
| Operating income                                                        |       | 4,550                   |       | 2,983                 |       | 27,914 |   | 17,777 |   |
| Interest expense                                                        |       | (3,422                  | )          | (4,087                | )          | (7,198 | ) | (10,117 | ) |
| Income tax expense                                                      |       | (150                    | )          | (150                  | )          | (875 | ) | (295 | ) |
| **Net income (loss)**                                                   |       | $                       | 978        |                  | $          | (1,254 | ) | $ | 19,841 |   | $ | 7,365 |   |

 

Therewere no foreign sales for the three and six months ended June 30, 2009 and2008.  The Partnership has no foreignassets.

 

**Note 11.**               Environmental Liabilities

** **

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

 

The Partnership maintains insurance of various typeswith varying levels of coverage that it considers adequate under thecircumstances to cover its operations and properties.  The insurance policies are subject todeductibles that the Partnership considers reasonable and not excessive.  In addition, the Partnership has entered intoindemnification agreements with various sellers in conjunction with several ofits acquisitions.  Allocation ofenvironmental liability is an issue negotiated in connection with each of thePartnership’s acquisition transactions. In each case, the Partnership makes an assessment of potential environmentalliability 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 environmental conditions.

 

In connection with the November 2007 acquisition of ExxonMobil’sGlenwood Landing and Inwood, New York terminals, the Partnership assumedcertain environmental liabilities, including the remediation obligations underremedial action plans submitted by ExxonMobil to and approved by the New YorkDepartment of Environmental Conservation (“NYDEC”) with respect to bothterminals.  As a result, the Partnershiprecorded, on an undiscounted basis, total environmental liabilities ofapproximately $1.2 million, of which approximately $0.6 million waspaid by the Partnership.  The remainingliability of $0.6 million was recorded as a current liability of$0.4 million and a long-term liability of $0.2 million on theaccompanying consolidated balance sheet at June 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.

 

21

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**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 June 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.

 

GlobalCompanies LLC, in addition to several affiliates, was named as one of over50 defendants in two lawsuits alleging methyl tertiary-butyl ether (“MTBE”)contamination of groundwater in Massachusetts. MTBE is an oxygenate that has been used extensively to reduce motorvehicle tailpipe emissions.  In the casesof Town of Duxbury, et al. v. Amerada Hess Corp., et al., filed December 31,2003, and City of Lowell v. Amerada Hess Corp., et al., filed December 30,2004, plaintiffs allege that manufacturers, refiners and others involved in thedistribution of gasoline containing MTBE are liable for the costs ofinvestigating possible MTBE groundwater contamination, treating suchcontaminated groundwater where found, and related relief including trebledamages and injunctive relief.  Theplaintiffs in these cases generally claim to be public water providers ormunicipal or other government authorities. These cases have been consolidated in multi-district litigation withover 60 other MTBE cases in federal court in the Southern District of NewYork.  The Partnership entered into anagreement to settle these cases and, as a result, the Partnership paid$0.9 million during the quarter ended June 30, 2009.  The matter with respect to GlobalCompanies LLC and affiliates has been dismissed.

 

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, and potentialmodification of, its remediation plans, the amount of data available uponinitial assessment of the impact of soil or water contamination, changes incosts associated with environmental remediation services and equipment and thepossibility 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 unit options,unit appreciation rights, restricted units, phantom units and distributionequivalent rights (“DERs”).

 

22

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

** **

*Long-Term Incentive Plan*

 

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

 

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

 

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

 

Withrespect to these awards, the Partnership recorded compensation expenses ofapproximately $0.2 million for each of the three months ended June 30,2009 and 2008, and $0.4 million for each of the six months ended June 30,2009 and 2008, which are included in selling, general and administrativeexpenses in the accompanying consolidated statements of operations.  The total compensation cost related to thenon-vested awards not yet recognized at June 30, 2009 is approximately$0.4 million and is expected to be recognized ratably over the remainingrequisite service period.

 

*Three-Year Phantom Units*

 

OnDecember 31, 2008, the Compensation Committee of the board of directors ofthe General Partner granted 99,700 phantom units to a named executiveofficer, including a contingent right to receive an amount in cash equal to thenumber of phantom units multiplied by the cash distribution per common unitmade by the Partnership from time to time during the period the phantom unitsare outstanding.  The phantom units,which are subject to graded vesting, will vest in six equal installments on June 30and December 31 of each year commencing June 30, 2009.  Compensation expense related to these phantomunits is recognized using the accelerated attribution method.  The Partnership recorded compensation expenserelated to this phantom unit award of approximately $0.2 million and$0.4 million for the three and six months ended June 30, 2009, respectively,which is included in selling, general and administrative expenses in theaccompanying consolidated statements of operations.  The total compensation cost related to thenon-vested awards not yet recognized at June 30, 2009 is approximately$0.7 million and is expected to be recognized over the remainingthree-year requisite service period.  On June 30,2009, 16,617 common units vested under this award and were distributed to thenamed executive officer.  In addition, inJuly 2009, the Partnership paid a cash distribution related to these unitsof approximately $8,000.

 

23

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

** **

*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 average closing price of the Partnership’s common unitfor any 10-consecutive trading day period.

 

Thefair value of the Partnership’s award at the February 5, 2009 grant dateapproximated the fair value of the Partnership’s common unit at that date,reduced by the present value of the distributions stream on the equivalentnumber of common units over the derived service period.  Compensation cost is recognized ratably overthe derived service period which was determined for each tranche using theMonte Carlo simulation model.  The derivedservice period of the award was assessed using expected volatility which wasestimated based on historical volatility of the Partnership’s units.  The Partnership recorded compensation expenserelated to this phantom units award of approximately $28,000 and$0.1 million for the three and six months ended June 30, 2009,respectively, which is included in selling, general and administrative expensesin the accompanying consolidated statements of operations.  The total compensation cost related to the non-vestedawards not yet recognized at June 30, 2009 is approximately$0.9 million and is expected to be recognized ratably over the remainingderived 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 negotiated transactions.  Such authorized unit repurchases may bemodified, suspended or terminated at any time, and are subject to price,economic and market conditions, applicable legal requirements and availableliquidity.  As of June 30, 2009, theGeneral Partner repurchased 76,975 common units pursuant to the RepurchaseProgram for approximately $1.4 million,of which 16,617 common units vested and were distributed (see “Three-YearPhantom Units” above).

 

At June 30, 2009,common units outstanding excluded 60,358 common units (76,975 common unitspurchased less 16,617 common units vested and distributed) held on behalf ofthe Partnership pursuant to its Repurchase Program and for future satisfactionof the General Partner’s Obligations.  As of June 30, 2009, 60,358 of the common unitspurchased under the Repurchase Program had not been distributed.

 

24

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

** **

*Status of Non-Vested Units*

 

Thefollowing table presents a summary of the status of the non-vested units as of June 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                                                |       | (16,617                          | )          | 11.30                                         |       |
| Forfeited                                             |       | —                           |       | —                                        |       |
| Outstanding non-vested units at June 30, 2009    |       | 423,480                          |       | $                                             | 8.95       |   |

 

**Note 13.**               Fair Value Measurements

 

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

 

SFAS No. 157establishes a fair value hierarchy, which prioritizes the inputs used inmeasuring fair value into the following three levels:

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

 

The following tablepresents those financial assets and financial liabilities measured at fairvalue on a recurring basis as of June 30, 2009 (in thousands):

 
| ** **                                   | ** ** | **Fair Value**    | ** ** | ** **                        | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **June 30,** | ** ** | **Fair Value Measurements Using** | ** ** |
| ** **                                   | ** ** | **2009**          | ** ** | **Level 1**                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                  |       |              |       |                              |       |   |   |   |   |
| Hedged inventories                           |       | $                 | 347,668    |                              | $          | — |   | $ | 347,668 |   | $ | — |   |
| Fair value of forward fixed price contracts  |       | 8,598             |       | —                            |       | 8,598 |   | — |   |
| Swap agreements and options                  |       | 2,528             |       | 711                               |       | 1,817 |   | — |   |
| Total assets                                 |       | $                 | 358,794    |                              | $          | 711 |   | $ | 358,083 |   | $ | — |   |
| ** **                                   |       |              |       |                              |       |   |   |   |   |
| **Liabilities:**                             |       |              |       |                              |       |   |   |   |   |
| Obligations on forward fixed price contracts |       | $                 | (14,300    | )                                 | $          | — |   | $ | (14,300 | ) | $ | — |   |
| Swap agreements and option contracts         |       | (5,357            | )          | (157                              | )          | (5,200 | ) | — |   |
| Interest rate collars                        |       | (7,431            | )          | —                            |       | (7,431 | ) | — |   |
| Total liabilities                            |       | $                 | (27,088    | )                                 | $          | (157 | ) | $ | (26,931 | ) | $ | — |   |

 

25

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

For assets andliabilities measured on a non-recurring basis during the period, SFAS No. 157requires quantitative disclosures about the fair value measurements separatelyfor each major category.  During thequarter ended June 30, 2009, the Partnership did not remeasure assets orliabilities at fair value on a non-recurring basis.

 

*Financial Instruments*

 

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

 

**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  June 30,** | ** ** | **Six Months Ended  June 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             |       | (27.1                                 | )%         | (54.0                               | )%         | (36.2 | )% | (36.5 | )% |
| Effective income tax rate                         |       | 13.3                                  | %          | (13.6                               | )%         | 4.2 | % | 3.9 | % |

 

**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.

 

**Note 16.**               Recent AccountingPronouncements

** **

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

 

26

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**GLOBALPARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

** **

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

 

In March 2008, theFASB issued SFAS No. 161 which enhances the requirements under SFAS No. 133.and requires enhanced disclosures about an entity’s derivatives and hedgingactivities and how they affect an entity’s financial position, financialperformance and cash flows.  The Partnershipadopted SFAS No. 161 on January 1, 2009.  See Note 5.

 

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

 

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

 

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

 

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

 

InApril 2009, theFASB issued FSP FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”).  This FSP amends SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments,” and requires disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements.  ThisFSP also amends APB Opinion No. 28, “Interim Financial Reporting,” which requires those disclosuresin summarized financial information at interim reporting periods.  This FSP is effective for interim reportingperiods ending after June 15, 2009. The adoption of FSP FAS 107-1and APB28-1 for the period ended June 30, 2009, did not have a materialimpact on the Partnership’s consolidated financial statements.  See Note 13.

 

In April 2009, theFASB issued FSP FAS 157-4, “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”(“FSP FAS 157-4”).  This FSPprovides guidance related to: (1) estimating fair value when the volumeand level of activity for an asset or liability have significantly decreased inrelation to normal market activity for the asset or liability, and (2) circumstancesthat may indicate that a transaction is not orderly (i.e., forced liquidationor distressed sale).  This FSP iseffective prospectively for interim and annual reporting periods ending after June 15,2009.  The adoption of FSP FAS 157-4did not have a material impact on the Partnership’s consolidated financialstatements.

 

In May 2009, theFASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”), which establishes general standards ofaccounting and disclosure of events that occur after the balance sheet date butbefore financial statements are issued or are available to be issued.  This statement requires entities to disclosethe date through which they have evaluated subsequent events and whether thedate corresponds with the release of their financial statements.  SFAS No. 165 is effective for interim and annualperiods ending after June 15, 2009. The Partnership adopted SFAS No. 165 as of June 30, 2009 which didnot have an impact on its consolidated financial statements.  See Note 17.

 

In June 2009, theFASB issued SFAS No. 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No. 168”).  SFAS No. 168 will become the singlesource of authoritative nongovernmental U.S. GAAP, superseding existing FASB,American Institute of Certified Public Accountants, EITF and related accountingliterature.  SFAS No. 168reorganizes the thousands of GAAP pronouncements into roughly 90 accountingtopics and displays them using a consistent structure.  Also included is relevant SEC guidanceorganized using the same topical structure in separate sections.  SFAS No. 168 will be effective forfinancial statements issued for reporting periods that end after September 15,2009.  The Partnership believes SFAS No. 168will have an impact on its consolidated financial statements as all futurereferences to authoritative accounting literature will be references inaccordance with SFAS No. 168.

 

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**GLOBAL PARTNERS LP**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 17.**               Subsequent Events

 

ThePartnership evaluated all events or transactions that occurred through August 7,2009, the date the Partnership issued its financial statements.  Except as described below, no materialsubsequent events have occurred since June 30, 2009 that requiredrecognition or disclosure in the accompanying financial statements.

 

OnJuly 23, 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 April 1, 2009 through June 30, 2009.  On August 14, 2009, the Partnership will paythis cash distribution to its common and subordinated unitholders of record asof the close of business August 5, 2009.

 

TheGeneral Partner repurchased an additional 28,025 common units pursuant to theRepurchase Program from July 1, 2009 through July 10, 2009.

 

OnAugust 5, 2009, Global Companies** **LLC (“Global”),a wholly owned subsidiary of the Partnership, entered into a Purchase and SaleAgreement (the “Purchase Agreement”) with Warex Terminals Corporation (“Warex”),a subsidiary of Warren Equities, Inc., pursuant to which Global agreed toacquire three refined products terminals from Warex for a total purchase priceof $47.5** **million (the “TerminalsAcquisition”).  The terminals, located inNewburgh, New York, have combined gasoline and distillate storage capacity of950,000 barrels.  The TerminalsAcquisition, which is expected to close in the fourth quarter of 2009, issubject to the receipt of certain regulatory approvals and various othercustomary closing conditions.  Warex isalso entering into a long-term throughput contract with Global to use theterminals upon closing of the Terminals Acquisition.

 

As of August 5, 2009,Global Energy Marketing LLC (“GEM”) entered into a Joinder Agreement with Bankof America, N.A., as Administrative Agent and L/C Issuer, Global Operating LLC,Global Companies LLC, Global Montello Group Corp., Glen Hes Corp. and ChelseaSandwich LLC, as borrowers, and the Partnership and the General Partner, asguarantors, which agreement joins GEM as a party to and an additional guarantorunder the Partnership’s Credit Agreement.

 

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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-Looking Statements**

** **

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 initially to remove our general partner without its consent,which could lower the trading price of our common units.

 

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

 

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

 

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

 

**Overview**

** **

***General***

*** ***

Weown, control or have access to one of the largest terminal networks of refinedpetroleum products in Massachusetts, Maine, Connecticut, Vermont, 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 six months ended June 30, 2009, we soldapproximately $1.2 billion and $2.8 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 energy commodities.  Through the use of regulated exchanges orderivatives, we maintain a position that is substantially balanced betweenpurchased volumes and sales volumes or future delivery obligations.  We earn a margin by selling the product forphysical delivery to third parties.

 

***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 the non-weathersensitive components of our business, such as transportation fuels; however, weare still subject to the impact that warmer weather conditions may have on ourhome heating oil and residual oil sales.

 

Ourbusiness is divided into two segments:

 

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

 

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

 

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

 

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***Outlook***

*** ***

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

 

·              *The condition of credit markets may adversely affect ourliquidity. *During thepast year, 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 temperatures duringthe first and fourth calendar quarters in the Northeast can decrease the totalvolume we sell and the gross profit realized on those sales.

 

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

 

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·              *Our financial 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 borrowing availablefor working capital under our credit agreement, which credit agreement hasborrowing 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.  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 refined petroleumproducts may diminish the amount of borrowings available for working capitalunder 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 trend inenvironmental regulation is towards more restrictions and limitations onactivities that may affect the environment. Our business may be adversely affected by increased costs andliabilities resulting from such stricter laws and regulations.  We try to anticipate future regulatoryrequirements that might be imposed and plan accordingly to remain in compliancewith changing environmental laws and regulations and to minimize the costs ofsuch compliance.  However, there can beno assurances as to the timing and type of such changes in existing laws or thepromulgation of new laws or the amount of any required expenditures associatedtherewith.

 

**Results of Operations**

** **

***EvaluatingOur Results of Operations***

*** ***

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

 

*Net Product Margin*

* *

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

 

*Gross Profit*

 

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

 

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*Selling, General 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;

 

·              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.

 

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*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 cash flow on a current or historic level thatcan sustain or support an increase in our quarterly cash distribution.  Distributable cash flow is a quantitativestandard used by the investment community with respect to publicly tradedpartnerships.  Distributable cash flowshould not be considered as an alternative to net income, cash flow fromoperations, or any other measure of financial performance presented inaccordance with GAAP.  In addition, ourdistributable cash flow may not be comparable to distributable cash flow orsimilarly titled measures of other companies.

 

***Threeand six months ended June 30, 2009 and 2008***

*** ***

Duringthe three and six months ended June 30, 2009, we experienced the followingevents:

 

·                  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 June 30, 2009 were 9% warmer than normal and 1%warmer than the second quarter of 2008. Temperatures for the six months ended June 30, 2009 were 1% colderthan normal and 7% colder than the same period in 2008.

 

·                  Weincreased our reserve for credit losses by expensing approximately$0.5 million and $1.1 million for the three and six months ended June 30,2009, respectively.

 

·                  Webelieve heating oil conservation continued during the three and six monthsended June 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 six months ended June 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 terminalinfrastructure was being converted.

 

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

 

Thefollowing table provides the percentage decreases in refined petroleum productand natural gas prices at the end of the first two quarters in 2009 as comparedto 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                                                | )%         |

 

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***(1)***          Source:  New York Mercantile 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** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                              | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                                       |       | $                       | 978        |                  | $          | (1,254 | ) | $ | 19,841 |   | $ | 7,365 |   |
|                                                    |       |                    |       |                  |       |   |   |   |   |
| Net income (loss) per diluted limited partner unit  (1) |       | $                       | 0.07       |                  | $          | (0.10 | ) | $ | 1.46 |   | $ | 0.55 |   |
|                                                    |       |                    |       |                  |       |   |   |   |   |
| EBITDA (2)                                              |       | $                       | 8,586      |                  | $          | 6,793 |   | $ | 35,952 |   | $ | 25,269 |   |
|                                                    |       |                    |       |                  |       |   |   |   |   |
| Distributable cash flow  (3)                            |       | $                       | 3,288      |                  | $          | 2,248 |   | $ | 25,284 |   | $ | 14,057 |   |
|                                                    |       |                    |       |                  |       |   |   |   |   |
| **Wholesale Segment:**                                  |       |                    |       |                  |       |   |   |   |   |
| Volume (gallons)                                        |       | 682,771                 |       | 688,825               |       | 1,721,390 |   | 1,691,148 |   |
| Sales                                                   |       |                    |       |                  |       |   |   |   |   |
| Distillates                                             |       | $                       | 405,060    |                  | $          | 883,577 |   | $ | 1,411,676 |   | $ | 2,486,987 |   |
| Gasoline                                                |       | 720,330                 |       | 1,283,676             |       | 1,221,989 |   | 2,258,744 |   |
| Residual oil                                            |       | 5,853                   |       | 25,220                |       | 17,343 |   | 43,577 |   |
| Total                                                   |       | $                       | 1,131,243  |                  | $          | 2,192,473 |   | $ | 2,651,008 |   | $ | 4,789,308 |   |
| Net product margin (4)                                  |       |                    |       |                  |       |   |   |   |   |
| Distillates                                             |       | $                       | 13,477     |                  | $          | 9,329 |   | $ | 47,330 |   | $ | 32,421 |   |
| Gasoline                                                |       | 12,127                  |       | 10,424                |       | 23,913 |   | 18,968 |   |
| Residual oil                                            |       | 2,294                   |       | 3,234                 |       | 5,114 |   | 7,130 |   |
| Total                                                   |       | $                       | 27,898     |                  | $          | 22,987 |   | $ | 76,357 |   | $ | 58,519 |   |
| **Commercial Segment:**                                 |       |                    |       |                  |       |   |   |   |   |
| Volume (gallons)                                        |       | 45,533                  |       | 41,768                |       | 121,261 |   | 103,579 |   |
| Sales                                                   |       | $                       | 69,906     |                  | $          | 105,236 |   | $ | 183,096 |   | $ | 229,393 |   |
| Net product margin (4)                                  |       | $                       | 2,596      |                  | $          | 2,323 |   | $ | 7,524 |   | $ | 4,929 |   |
| **Combined sales and net product  margin:**             |       |                    |       |                  |       |   |   |   |   |
| Sales                                                   |       | $                       | 1,201,149  |                  | $          | 2,297,709 |   | $ | 2,834,104 |   | $ | 5,018,701 |   |
| Net product margin (4)                                  |       | $                       | 30,494     |                  | $          | 25,310 |   | $ | 83,881 |   | $ | 63,448 |   |
| Depreciation allocated to  cost of sales                |       | 2,705                   |       | 2,637                 |       | 5,378 |   | 5,159 |   |
| **Combined gross profit**                               |       | $                       | 27,789     |                  | $          | 22,673 |   | $ | 78,503 |   | $ | 58,289 |   |
|                                                    |       |                    |       |                  |       |   |   |   |   |
| **Weather conditions:**                                 |       |                    |       |                  |       |   |   |   |   |
| Normal heating degree days                              |       | 784                     |       | 784                   |       | 3,654 |   | 3,685 |   |
| Actual heating degree days                              |       | 716                     |       | 721                   |       | 3,693 |   | 3,449 |   |
| Variance from normal  heating degree days               |       | (9                      | )%         | (8                    | )%         | 1 | % | (6 | )% |
| Variance from prior period  actual heating degree days  |       | (1                      | )%         | (12                   | )%         | 7 | % | (8 | )% |

 

----

(1)            SeeNote 2 of Notes to Consolidated Financial Statements for net income (loss) perdiluted limited partner unit calculation.

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

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

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

 

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

 
| ** **                                                                             | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                                                             | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Reconciliation of net income (loss) to EBITDA:**                                     |       |                    |       |                  |       |   |   |   |   |
| Net income (loss)                                                                      |       | $                       | 978        |                  | $          | (1,254 | ) | $ | 19,841 |   | $ | 7,365 |   |
| Depreciation and amortization and amortization of  deferred financing fees             |       | 4,036                   |       | 3,810                 |       | 8,038 |   | 7,492 |   |
| Interest expense                                                                       |       | 3,422                   |       | 4,087                 |       | 7,198 |   | 10,117 |   |
| Income tax expense                                                                     |       | 150                     |       | 150                   |       | 875 |   | 295 |   |
| EBITDA                                                                                 |       | $                       | 8,586      |                  | $          | 6,793 |   | $ | 35,952 |   | $ | 25,269 |   |
|                                                                                   |       |                    |       |                  |       |   |   |   |   |
| **Reconciliation of cash flow (used in) provided  by operating activities to EBITDA:** |       |                    |       |                  |       |   |   |   |   |
| Cash flow (used in) provided by operating activities                                   |       | $                       | (91,049    | )                     | $          | (103,790 | ) | $ | 20,181 |   | $ | (5,973 | ) |
| Net changes in operating assets and liabilities and  certain non-cash items            |       | 96,063                  |       | 106,346               |       | 7,698 |   | 20,830 |   |
| Interest expense                                                                       |       | 3,422                   |       | 4,087                 |       | 7,198 |   | 10,117 |   |
| Income tax expense                                                                     |       | 150                     |       | 150                   |       | 875 |   | 295 |   |
| EBITDA                                                                                 |       | $                       | 8,586      |                  | $          | 6,793 |   | $ | 35,952 |   | $ | 25,269 |   |

 

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** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                                                                              | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Reconciliation of net income  (loss) to distributable****cash flow:**                                 |       |                    |       |                  |       |   |   |   |   |
| Net income (loss)                                                                                       |       | $                       | 978        |                  | $          | (1,254 | ) | $ | 19,841 |   | $ | 7,365 |   |
| Depreciation and amortization and amortization of  deferred financing fees                              |       | 4,036                   |       | 3,810                 |       | 8,038 |   | 7,492 |   |
| Maintenance capital  expenditures                                                                       |       | (1,726                  | )          | (308                  | )          | (2,595 | ) | (800 | ) |
| Distributable cash flow                                                                                 |       | $                       | 3,288      |                  | $          | 2,248 |   | $ | 25,284 |   | $ | 14,057 |   |
|                                                                                                    |       |                    |       |                  |       |   |   |   |   |
| **Reconciliation of cash flow  (used in) provided by operating activities to distributable cash flow:** |       |                    |       |                  |       |   |   |   |   |
| Cash flow (used in)  provided by operating activities                                                   |       | $                       | (91,049    | )                     | $          | (103,790 | ) | $ | 20,181 |   | $ | (5,973 | ) |
| Net changes in operating  assets and liabilities and certain non-cash items                             |       | 96,063                  |       | 106,346               |       | 7,698 |   | 20,830 |   |
| Maintenance capital  expenditures                                                                       |       | (1,726                  | )          | (308                  | )          | (2,595 | ) | (800 | ) |
| Distributable cash flow                                                                                 |       | $                       | 3,288      |                  | $          | 2,248 |   | $ | 25,284 |   | $ | 14,057 |   |

 

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***Consolidated Results***

 

Ourtotal sales for the second quarter of 2009 decreased by $1,096.6 million, or48%, to $1,201.1 million compared to $2,297.7 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 June 30,2009 compared to the same period in 2008. Our aggregate volume of product sold decreased by approximately 2 million gallons to 729** **milliongallons.  The decrease in volumeprimarily includes decreases of approximately 7 million gallons and 9 million gallons in distillates and residualoil, respectively, attributable to warmer temperatures during the secondquarter of 2009 compared to the same period in 2008.  The decrease in volume sold was offset by anincrease of 10 milliongallons in gasoline.

 

The number of actual heating degree days decreasedby 1% to 716 for the three months ended June 30, 2009 compared with 721for the same period in 2008.  Our gross profitfor the second quarter of 2009 was $27.8** **million,an increase of $5.1** **million,or 22%, compared to $22.7** **millionfor the same period in 2008.  Theincrease was primarily due to higher net product margins in distillates andgasoline.

 

Ourtotal sales for the six months ended June 30, 2009 decreased by$2,814.6 million, or 44%, to $2,834.1 million compared to$5,018.7 million for the same period in 2008.  Thedecrease was driven primarily by significantly lower refined petroleum productand natural gas prices for the six months ended June 30, 2009 compared tothe same period in 2008.  Our aggregatevolume of product sold increased by approximately 48 million gallons, or 3%, to 1,843** **milliongallons.  The increase in volumeprimarily includes increases of approximately 36 million gallons in distillates and 9 million gallons in gasoline.

 

The number of actual heating degree days increased7% to 3,693 for the six months ended June 30, 2009 compared with 3,449 forthe same period in 2008.  Our gross profitfor the six months ended June 30,2009 was $78.5** **million,an increase of $20.2** **million,or 35%, compared to $58.3** **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 June 30, 2009 were $405.1 million compared to$883.6 million for the three months ended June 30, 2008.  During the first six months of 2009,wholesale distillate sales were $1,411.7 million compared to$2,487.0 million for the same period in 2008.  The decreases of $478.5 million, or 54%,and $1,075.3 million, or 43%, for the three and six months ended June 30,2009, respectively, were due to the significantlylower refined petroleum product prices.

 

We experienced an 8 milliongallon, or 3%, decrease in distillate volume sold for the second quarter of2009 compared to the same period in 2008 which was attributed to warmertemperatures and a 27 milliongallon, or 3%, increase in distillate volume sold for the six months ended June 30,2009 compared to the same period in 2008 which was attributed to colder temperatures.

 

Ournet product margin from distillate sales increased by $4.2 million, or45%, to $13.5 million for the three months ended June 30, 2009 and by$14.9 million, or 46% to $47.3 million for the six months ended June 30,2009 compared to the same periods in 2008, primarily attributable to betterunit margins and, for the six months ended June 30, 2009 compared to thesame period in 2008, an increase in volume.

 

Gasoline.  Wholesale gasoline sales for the three monthsended June 30, 2009 were $720.3 million compared to$1,283.7 million for the same period in 2008.  During the first six months of 2009,wholesale gasoline sales were $1,222.0 million compared to$2,258.7 million for the same period in 2008.  The decreases of $563.4 million, or44%, and $1,036.7 million,or 46%, were due primarily to significantly lower gasoline pricescompared to the prior periods.

 

Ournet product margin from gasoline sales increased by $1.7 million to$12.1 million for the three months ended June 30, 2009 and by$4.9 million to $23.9 million for the six months ended June 30,2009 compared to the same periods in 2008. These increases were primarily attributable to better unit margins andincreases in gasoline volume for the three and six months ended June 30,2009 compared to the same periods in 2008.

 

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ResidualOil.  Wholesale residualoil sales for the three months ended June 30, 2009 were $5.8 millioncompared to $25.2 million for the three months ended June 30,2008.  During the first six months of2009, residual oil sales were $17.3 million compared to $43.6 millionfor the same period in 2008.  Thedecreases of $19.4 million, or 77%, and $26.3 million, or 60%, wereprimarily due to significantly lower refined petroleum product prices comparedto the prior periods and decreases in volume sold of 8 million and6 million for the three and six months ended June 30, 2009,respectively, compared to the same periods in 2008.  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.

 

Our net product margin contribution fromresidual oil sales decreased by $0.9 million, or 29%, to $2.3 millionfor the three months ended June 30, 2009 and by $2.0 million, or 28%,to $5.1 million for the six months ended June 30, 2009 compared tothe same periods in 2008 due to intensified competition in the marketplace.

 

*Commercial Segment*

* *

Inour Commercial segment, residual oil accounted for approximately 55% and 63% oftotal commercial volume sold for the three months ended June 30, 2009 and2008, respectively, and approximately 63% and 68% for the six months ended June 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 June 30, 2009 decreased by 40%compared to the same period in 2008.  Forthe six months ended June 30, 2009, residual oil sales decreased 29%compared to the same period in 2008.  Weattribute the decreases in sales to the competitive pricing from natural gas,reductions in production by certain industry participants in our markets anddecreases in residual oil volume sold.

 

*Selling, General and Administrative Expenses*

 

SG&Aexpenses increased by $3.1 million, or 30%, to $13.3 million for thethree months ended June 30, 2009 compared to $10.2 million for thesame period in 2008.  The increase wasprimarily due to increases of $0.5 million in bad debt accrual due to somecredit strain on our customer base, $0.4 million in employee benefits,$0.3 million in professional fees, $0.2 million in costs associatedwith the expansion of our natural gas operations, $0.2 million incompensation cost on our long-term incentive plan, $0.1 million in accruedbonuses, $0.1 million in bank fees and $1.3 million in various otherSG&A expenses, including information systems, marketing and productpromotion and diligence on expansion projects.

 

SG&Aexpenses increased by $10.1 million, or 47%, to $31.4 million for thesix months ended June 30, 2009 compared to $21.3 million for the sameperiod in 2008.  The increase wasprimarily due to increases of $5.0 million in accrued bonuses,$1.1 million in bad debt accrual due to some credit strain on our customerbase, $0.9 million in professional fees, $0.7 million in employeebenefits, $0.5 million in compensation cost on our long-term incentiveplan, $0.5 million in bank fees, $0.2 million in costs associatedwith the expansion of our natural gas operations and $1.2 million invarious other SG&A expenses, including information systems, marketing andproduct promotion and diligence on expansion projects.

 

*Operating Expenses*

* *

Operatingexpenses increased by $0.3 million, or 4%, to $9.1 million for thethree months ended June 30, 2009 compared to $8.8 million for thesame period in 2008.  The increase wasprimarily due to increased costs of approximately $0.5 million related toour recently leased storage facility in Long Island, New York and$0.3 million in other operating costs, offset by $0.5 million in costsavings related to the non-renewal of the terminal lease in New Haven,Connecticut.

 

Operatingexpenses decreased by $0.2 million, or 1%, to $17.6 million for thesix months ended June 30, 2009 compared to $17.8 million for the sameperiod in 2008.  The decrease wasprimarily due to decreases of $1.0 million in cost savings related to thenon-renewal of the terminal lease in New Haven, Connecticut, offset byapproximately $0.7 million related to our recently leased storage facilityin Long Island, New York and $0.1 million in other operating costs.

 

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***Interest Expense***

*** ***

Interestexpense for the three months ended June 30, 2009 decreased by$0.7 million, or 16%, to $3.4 million compared to $4.1 millionfor the same period in 2008.  Interestexpense for the six months ended June 30, 2009 decreased by$2.9 million, or 29%, to $7.2 million compared to $10.1 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 six months ended June 30, 2009 compared to the same periodsin 2008.  The decreases in interestexpense were partially offset by an increase in the costs of borrowingscommencing with the July 18, 2008 amendment to the credit agreement.

 

**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 $82.0 million to $280.6 million at June 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 andon May 15, 2009, we paid a cash distribution to our common andsubordinated unitholders and our general partner of approximately$6.5 million for the first quarter of 2009.  On July 23, 2009, the board of directorsof our general partner declared a quarterly cash distribution of $0.4875 perunit for the period from April 1, 2009 through June 30, 2009 ($1.95per unit on an annualized basis) to our common and subordinated unitholders ofrecord as of the close of business August 5, 2009.  We expect to pay the cash distribution of approximately$6.5 million on August 14, 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 representcapital expenditures to replace partially or fully depreciated assets tomaintain the operating capacity of, or sales generated by, existing assets andextend their useful lives, such as expenditures required to maintain equipmentreliability, tankage and pipeline integrity and safety, and to addressenvironmental regulations.  We anticipatethat maintenance capital expenditures will be funded with cash generated byoperations.  We had approximately$2.6 million and $0.8 million in maintenance capital expenditures forthe six months ended June 30, 2009 and 2008, respectively, which areincluded in capital expenditures in the accompanying consolidated statements ofcash flows.  Repair and maintenanceexpenses associated with existing assets that are minor in nature and do notextend the useful life of existing assets are charged to operating expenses asincurred.

 

Expansioncapital expenditures include expenditures to acquire assets to grow ourbusiness and to expand existing facilities, such as projects that increaseoperating capacity by increasing tankage, diversifying product availability atvarious terminals and adding terminals. We generally fund our expansion capital expenditures through our cashgenerated from operations or our acquisition and working capital revolvingcredit facilities or by issuing additional equity.  We had approximately $3.7 million and$4.7 million in expansion capital expenditures for the six months ended June 30,2009 and 2008, respectively, to increase our operating capacity andcapabilities.  Specifically, for the sixmonths ended June 30, 2009, expansion capital expenditures consisted ofapproximately $2.7 million in costs related to dock expansion and bringingformerly out-of-permit tanks back online at the Albany, New York terminal,$0.8 million in additional terminal equipment at the Providence, Rhode Islandterminal and $0.2 million in automation costs at our recently leasedstorage facility in Long Island, New York. Comparatively, for the six months ended June 30, 2008, expansioncapital expenditures included $2.7 million in expenditures related toconstruction in process on our leased terminal in Providence, Rhode Island,$1.1 million related to conversion expenditures to handle ethanol-basedgasoline and $0.9 million in other expansion capital expenditures.

 

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Webelieve that we will have cash flow from operations, borrowing capacity underour credit agreement and the ability to issue additional common units and/ordebt securities to meet our financial commitments, debt service obligations,contingencies and anticipated capital expenditures.  However, we are subject to business andoperational risks that could adversely affect our cash flow.  A material decrease in our cash flows wouldlikely produce an adverse effect on our borrowing capacity.

 

***CashFlow***

*** ***

Thefollowing table summarizes cash flow activity (in thousands):

 
| ** **                                                       | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **June 30  31,** | ** ** |
| ** **                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Net cash provided by (used in) provided by operating  activities |       | $                     | 20,181     |   | $ | (5,973 | ) |
| Net cash used in investing activities                            |       | $                     | (6,303     | ) | $ | (5,510 | ) |
| Net cash (used in) provided by financing activities              |       | $                     | (11,861    | ) | $ | 11,793 |   |

 

Cashflow from operating activities generally reflects our net income, the purchasingpatterns of inventory, the timing of collections on our accounts receivable,the seasonality of our business, fluctuations in refined petroleum productprices, our working capital requirements related to acquisitions and generalmarket conditions.

 

Netcash provided by operating activities was $20.2 million for the six monthsended June 30, 2009 compared to net cash used in operating activities of$6.0 million for the six months ended June 30, 2008.

 

Duringthe six months ended June 30, 2009, refined petroleum product and naturalgas prices declined significantly compared to the same period in 2008, causingthe carrying values of our accounts receivable and accounts payable for the sixmonths ended June 30, 2009 to be less than the carrying values we experiencedfor the six months ended June 30, 2008. As a result, for the six months ended June 30, 2009, we haddecreases of $58.8 million and $87.6 million in accounts receivableand accounts payable, respectively, while, we had decreases of$37.1 million and $40.4 million in accounts receivable and accountspayable, respectively, for the six months ended June 30, 2008.

 

Due to favorable marketconditions, we elected to use our storage capacity to carry increasedinventories of approximately $129.0 million for the six months ended June 30,2009.  Comparatively, for the six monthsended June 30, 2008 when prices were higher, inventories increased by only$3.2 million for the six months ended June 30, 2008. Through the use of regulated exchanges or derivatives, we maintain aposition that is substantially hedged with respect to such inventories.

 

Thecash provided by operating activities is also reflected in the year-over-yearincrease in net income of $12.4 million and a $167.0 million changein the fair value of our forward fixed price contracts.  For the six months ended June 30, 2009,contracts supporting our forward fixed price hedge program provided funds fromthe NYMEX of approximately$159.5 million while for the six months ended June 30, 2008 similarhedging activity required margin payments of approximately $7.5 million tothe NYMEX due to market direction.

 

Netcash used in investing activities increased by $0.8 million for the sixmonths ended June 30, 2009 compared to the same period in 2008 and included$2.6 million in maintenance capital expenditures and $3.7 million inexpansion capital expenditures ($2.7 million in costs related to dockexpansion and bringing formerly out-of-permit tanks back online at the Albany,New York terminal, $0.8 million in additional terminal equipment at theProvidence, Rhode Island terminal and $0.2 million in automation costs atour recently leased storage facility in Long Island, New York).  Comparatively, for the six months ended June 30,2008, net cash used in investing activities included $5.5 million in totalcapital expenditures comprised of $0.8 million in maintenance capitalexpenditures and $4.7 million in expansion capital expenditures($2.7 million related to construction in process on our leased terminal inProvidence, Rhode Island, $1.1 million related to conversion expendituresto handle ethanol-based gasoline and $0.9 million in other expansioncapital expenditures).

 

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Netcash used in financing activities was $11.9 million for the six monthsended June 30, 2009 and included $13.0 million in cash distributionsto our common and subordinated unitholders and our general partner,$1.3 million in the repurchases of common units held on our behalfpursuant to our Repurchase Program and for future satisfaction of our General Partner’sObligations (as defined in Note 12of Notes to Consolidated Financial Statements), offset by$2.5 million in net proceeds on our credit facilities.  The $1.3 million in the repurchases of common units excludesapproximately $0.1 millionof additional funds due upon trade settlement in July 2009.  Comparatively, for the six months ended June 30,2008, net cash provided by financing activities included net proceeds from ourcredit facilities of $26.1 million, offset by $13.1 million in cashdistributions to our common and subordinated unitholders and our generalpartner and $1.2 million in payments on our note payable.

 

***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 the year.  The long-term portion of the working capitalrevolving credit facility is the amount we expect to be outstanding during theentire year.  The credit agreement willmature on April 22, 2011.

 

Thereare three facilities under our credit agreement:

 

·                  aworking capital revolving credit facility to be used for working capitalpurposes and letters of credit in the principal amount equal to the lesser ofour borrowing base and $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 

 

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in the credit agreement,which in turn depends upon the Combined Interest Coverage Ratio.  The average interest ratewas approximately 3.8% for each of the three months ended June 30, 2009and 2008.  The average interest rateswere approximately 3.8% and 4.2% for the six months ended June 30, 2009and 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.

 

Asof June 30, 2009, we had total borrowings outstanding under our creditagreement of $436.0 million, including $71.2 million outstanding onour acquisition facility, and outstanding letters of credit of $54.0 million.  The total remaining availability forborrowings and letters of credit at June 30, 2009 and December 31,2008 was $260.0 million and $211.3 million, respectively.

 

Thecredit agreement imposes financial covenants that require us to maintain certainminimum working capital amounts, capital expenditure limits, a minimum EBITDAratio, a minimum combined interest coverage ratio and a maximum leverageratio.  We were in compliance with theforegoing covenants at June 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 our assetsand 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; 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.

 

***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.

 

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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.

 

**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 ratewas approximately 3.8% for each of the three months ended June 30, 2009 and2008.  The average interest rates wereapproximately 3.8% and 4.2% for the six months ended June 30, 2009 and2008, respectively.

 

Asof June 30, 2009, we had total borrowings outstanding under the creditagreement of $436.0 million.  Theimpact of a 1% increase in the interest rate on this amount of debt would haveresulted in an increase in interest expense, and a corresponding decrease inour results of operations, of approximately $4.4 million annually,assuming, however, that our indebtedness remained constant throughout the year.

 

We executed two zero premiuminterest rate collars with major financial institutions.  Each collar is designated as a cash flowhedge and accounted for under the provisions of SFAS No. 133.  The first collar, which became effective on May 14,2007 and expires on May 14, 2011, is used to hedge the variability ininterest payments due to changes in the three-month LIBOR rate with respect to$100.0 millionof three-month LIBOR-based borrowings. Under the first collar, we capped our exposure at a maximum three-monthLIBOR rate of 5.75% and established a minimum floor rate of 3.75%.  Whenever the three-month LIBOR rate isgreater than the cap, we receive from the respective financial institution thedifference between the cap and the current three-month LIBOR rate on the $100.0 million of three-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 June 30, 2009, the three-month LIBOR rate of 0.91% 

 

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waslower than the floor rate.  As a result,in August, we will remit to the respective financial institution the differencebetween the floor rate and the current rate which amounted to approximately$379,000.

 

On September 29, 2008,we executed our second zero premium interest rate collar.  The second collar, which became effective on October 2,2008 and expires on October 2, 2013, is used to hedge the variability in cash flows in monthlyinterest payments made on our $100.0 million one-month LIBOR-based borrowings (and subsequentrefinancings thereof) due to changes in the one-month LIBOR rate.  Under the second collar, we capped ourexposure at a maximum one-month LIBOR rate of 5.50% and established a minimumfloor rate of 2.70%.  Whenever theone-month LIBOR rate is greater than the cap, we receive from the respectivefinancial institution the difference between the cap and the current one-monthLIBOR rate on the $100.0 millionof one-month LIBOR-based borrowings. Conversely, whenever the one-month LIBOR rate is lower than the floor,we remit to the respective financial institution the difference between thefloor and the current one-month LIBOR rate on the $100.0 million of one-month LIBOR-based borrowings.  As of June 30, 2009, the one-month LIBORrate of 0.32% was lower than the floor rate. As a result, in July 2009, we remitted to the respective financialinstitution the difference between the floor rate and the current rate whichamounted to approximately $192,000.  See Note 5of Notes to Consolidated Financial Statements for further discussion on theinterest rate 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 refinedpetroleum products.  Any hedgeineffectiveness is reflected in our results of operations.  We utilize the NYMEX, which is a regulatedexchange for energy products that it trades, thereby reducing potentialdelivery and supply risks.  Generally,our practice is to close all NYMEX positions rather than to make or receivephysical deliveries.  With respect toother energy products, we enter into derivative agreements with counterpartiesthat we believe have a strong credit profile, in order to hedge marketfluctuations and/or lock-in margins relative to our commitments.

 

AtJune 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 are shown in the table below (in thousands):

 

Gain (loss):

 
| ** **                     | ** ** | **Fair Value at  June 30, 2009** | ** ** | **Effect of 10%****Price Increase** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| NYMEX contracts                |       | $                                     | (31,014    | )                                   | $          | (23,255 | ) |
| Swaps, options and other,  net |       | (2,830                                | )          | (5,019                              | )          |
|                           |       | $                                     | (33,844    | )                                   | $          | (28,274 | ) |

 

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Thefair values of the futures contracts are based on quoted market prices obtainedfrom the NYMEX.  The fair value of theswaps and option contracts are estimated based on quoted prices from varioussources such as independent reporting services, industry publications andbrokers.  These quotes are compared tothe contract price of the swap, which approximates the gain or loss that wouldhave been realized if the contracts had been closed out at June 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 inprice regardless of term or historical relationships between the contractualprice of the instruments and the underlying commodity price.  In the event of an actual 10% change inprompt month prices, the fair value of our derivative portfolio would typicallychange less than that shown in the table due to lower volatility in out-monthprices.  We have a daily marginrequirement to maintain a cash deposit with our broker based on the prior day’smarket results on open futures contracts. The balance of this deposit will fluctuate based on our open marketpositions and the commodity exchange’s requirements.  The required brokerage margin balance was$25.9 million at June 30, 2009.

 

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 the participationof our principal executive officer and principal financial officer, managementevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) or 15d-15(e) of the ExchangeAct).  Based on that evaluation, ourprincipal executive officer and principal financial officer concluded that ourdisclosure controls and procedures were effective as of June 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 June 30, 2009 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

***General***

 

Althoughwe may, from time to time, be involved in litigation and claims arising out ofour operations in the normal course of business, we do not believe that we area party to any litigation that will have a material adverse impact on ourfinancial condition or results of operations. Except as described 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.

 

**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 June 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)**              | ** ** |
| April 1 – April 30, 2009 |       | —           |       | —         |       | —                    |       | —                       |       |
| May 1 – May 31, 2009     |       | —           |       | —         |       | —                    |       | —                       |       |
| June 1 – June 30, 2009   |       | 76,975           |       | 18.21          |       | 76,975                    |       | —                       |       |

 

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(1)             On May 7, 2009, the board ofdirectors of the general partner announced that it authorized the repurchase ofour common units for the purpose of assisting us in meeting the generalpartner’s anticipated obligations to deliver common units under our LTIP andmeeting the general partner’s obligations under existing employment agreementsand other employment related obligations of the general partner.  We areauthorized to spend up to $6.6 million to acquire up to 445,000 of our common units inthe aggregate, over an extended period of time, consistent with the generalpartner’s obligations under the LTIP and employment agreements.  Common units may be repurchased from time totime in open market transactions, including block purchases, or in privatelynegotiated transactions.  Such authorizedunit repurchases may be modified, suspended or terminated at any time, and aresubject to price, economic and market conditions, applicable legal requirementsand 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).                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1       | — | Joinder Agreement, dated  as of August 5, 2009, among Global Energy Marketing** **LLC, as a new guarantor, Global  Operating LLC, Global Companies LLC, Global Montello Group Corp.,  Glen Hes Corp. and Chelsea Sandwich LLC, as borrowers, Global  Partners LP and Global GP LLC, as guarantors, and Bank of  America, N.A., as Administrative Agent and L/C Issuer. |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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:  August 7, 2009 |                   | By: | /s/ Eric Slifka |
|                             |                   |   | Eric Slifka |
|                             |                   |   | President and Chief Executive Officer |
|                             |                   |   | (Principal Executive Officer) |
|                             |                   |   |   |
|                             |                   |   |   |
| Dated:  August 7, 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). |
|                |   |   |   |            |   |
| 10.1                |   |   | — |            | Joinder Agreement, dated  as of August 5, 2009, among Global Energy Marketing** **LLC, as a new guarantor, Global  Operating LLC, Global Companies LLC, Global Montello Group Corp.,  Glen Hes Corp. and Chelsea Sandwich LLC, as borrowers, Global  Partners LP and Global GP LLC, as guarantors, and Bank of  America, N.A., as Administrative Agent and L/C Issuer. |
|                |   |   |   |            |   |
| 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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