Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q/A

(Amendment No. 1)

 


(Mark One)

 

 

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the quarterly period ended September 30, 2013

 

 

 

 

 

 

 

OR

 

 

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the transition period from              to              

 

 

Commission file number 001-32593

 

Global Partners LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-3140887

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

P.O. Box 9161
800 South Street
Waltham, Massachusetts 02454-9161

(Address of principal executive offices, including zip code)

 

(781) 894-8800
(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Smaller reporting company  o

 

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

The issuer had 27,430,563 common units outstanding as of November 5, 2013.

 

 



Table of Contents

 

TABLE OF CONTENTS

 

EXPLANATORY NOTE

1

 

 

PART I.                           FINANCIAL INFORMATION

 

 

 

Item 1.                     Financial Statements

2

 

 

Consolidated Balance Sheets as of September 30, 2013 (restated) and December 31, 2012

2

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2013 (restated) and 2012

3

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 (restated) and 2012

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 (restated) and 2012

5

 

 

Consolidated Statement of Partners’ Equity for the nine months ended September 30, 2013 (restated)

6

 

 

Notes to Consolidated Financial Statements

7

 

 

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

48

 

 

Item 3.                     Quantitative and Qualitative Disclosures about Market Risk

70

 

 

Item 4.                     Controls and Procedures

72

 

 

PART II.  OTHER INFORMATION

74

 

 

Item 1.                     Legal Proceedings

74

 

 

Item 1A.            Risk Factors

74

 

 

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

74

 

 

Item 6.                     Exhibits

75

 

 

SIGNATURES

 

 

 

INDEX TO EXHIBITS

 

 



Table of Contents

 

EXPLANATORY NOTE

 

 

To reflect the corrections described below, Global Partners LP (the “Partnership”) is amending its Quarterly Report on Form 10-Q and restating its unaudited consolidated financial statements for each of the quarters ended March 31, 2013, June 30, 2013 and September 30, 2013 (the “Restated 2013 Quarters) and related disclosures.  This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q of the Partnership for the fiscal quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on November 7, 2013, and restates its unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2013 and the notes thereto and related disclosure.  As a result, the unaudited consolidated financial statements included in the originally filed Form 10-Q for the quarter ended September 30, 2013 should not be relied upon.

 

The Partnership is restating its unaudited consolidated financial statements primarily to reflect a correction in its accounting for Renewable Identification Numbers (“RINs”).  A RIN is a serial number assigned to a batch of biofuel for the purpose of tracking its production, use, and trading as required by the Environmental Protection Agency’s (“EPA”) Renewable Fuel Standard that originated with the Energy Policy Act of 2005.  To evidence that the required volume of renewable fuel is blended with gasoline, obligated parties must retire sufficient RINs to cover their Renewable Volume Obligation (“RVO”).  The Partnership’s EPA obligations relative to renewable fuel reporting are largely limited to the foreign gasoline that the Partnership may choose to import.  As a wholesaler of transportation fuels through its terminals, the Partnership separates RINs from renewable fuel through blending with gasoline and can use those separated RINs to settle its RVO.  While the annual compliance period for a RVO is a calendar year, the settlement of the RVO can occur, upon certain deferral elections, more than one year after the close of the compliance period.

 

In connection with the year ended December 31, 2013 financial statement close process, certain misstatements were identified related to the Partnership’s accounting for the RVO, RIN inventory and the mark to market loss related to RIN forward commitments.  The Partnership has corrected its accounting for RINs, which included the recognition of a mark-to-market liability associated with the RVO deficiency at period end.  The Partnership is restating its consolidated balance sheet at September 30, 2013 and the results of operations for the three and nine months ended September 30, 2013 to reflect in the proper period the impact of these accounting corrections.

 

Additionally, the Partnership determined that at September 30, 2013, certain accrued liabilities related to the procurement of petroleum products were no longer warranted.  The Partnership is restating its consolidated balance sheet at September 30, 2013 and results of operations for the three and nine months then ended to reflect the correction of the timing of the relief of these accrued liabilities at that date.

 

The Partnership has also corrected other items that individually and in the aggregate are immaterial to the Partnership’s operating results.  The more significant of these items include a correction to the Partnership’s business combination accounting related to a 2013 acquisition and an income statement classification error related to the Partnership’s presentation of amortization of deferred financing fees.

 

The unaudited consolidated financial statements and the notes thereto included herein have been restated to reflect these corrections, and disclosures of these corrections have been made to the discussion under Part I, Item 2., Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

The Partnership is refiling the Form 10-Q in its entirety in this Amendment No. 1, except as stated above and for the disclosure included in Part I, Item 4., Controls and Procedures. The Partnership has included new certifications of its officers pursuant to Sections 302 and 906 of the Sarbanes Oxley Act with this Form 10-Q/A.

 

1



Table of Contents

 

Item 1.   Financial Statements

 

GLOBAL PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(Restated)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,068

 

$

5,977

 

Accounts receivable, net

 

625,829

 

696,762

 

Accounts receivable—affiliates

 

1,496

 

1,307

 

Inventories

 

397,412

 

634,667

 

Brokerage margin deposits

 

40,694

 

54,726

 

Fair value of forward fixed price contracts

 

37,001

 

48,062

 

Prepaid expenses and other current assets

 

41,591

 

65,432

 

Total current assets

 

1,159,091

 

1,506,933

 

 

 

 

 

 

 

Property and equipment, net

 

838,424

 

712,322

 

Intangible assets, net

 

73,663

 

60,822

 

Goodwill

 

118,390

 

32,326

 

Other assets

 

17,701

 

17,349

 

Total assets

 

$

2,207,269

 

$

2,329,752

 

Liabilities and partners’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

615,093

 

$

759,698

 

Working capital revolving credit facility—current portion

 

 

83,746

 

Term loan

 

115,000

 

 

Environmental liabilities—current portion

 

4,271

 

4,341

 

Trustee taxes payable

 

75,891

 

91,494

 

Accrued expenses and other current liabilities

 

60,621

 

71,442

 

Obligations on forward fixed price contracts

 

38,885

 

34,474

 

Total current liabilities

 

909,761

 

1,045,195

 

Working capital revolving credit facility—less current portion

 

300,300

 

340,754

 

Revolving credit facility

 

399,700

 

422,000

 

Senior notes

 

68,163

 

 

Environmental liabilities—less current portion

 

37,651

 

39,831

 

Other long-term liabilities

 

44,454

 

45,511

 

Total liabilities

 

1,760,029

 

1,893,291

 

Partners’ equity

 

 

 

 

 

Global Partners LP equity:

 

 

 

 

 

Common unitholders (27,430,563 units issued and 27,268,247 outstanding at September 30, 2013 and 27,430,563 units issued and 27,310,648 outstanding at December 31, 2012)

 

409,728

 

456,538

 

General partner interest (0.83% interest with 230,303 equivalent units outstanding at September 30, 2013 and December 31, 2012)

 

(487

)

(407

)

Accumulated other comprehensive loss

 

(13,877

)

(19,670

)

Total Global Partners LP equity

 

395,364

 

436,461

 

Noncontrolling interest

 

51,876

 

 

Total partners’ equity

 

447,240

 

436,461

 

Total liabilities and partners’ equity

 

$

2,207,269

 

$

2,329,752

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per unit data)

(Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

4,433,426

 

$

4,617,194

 

$

14,794,372

 

$

12,508,738

 

Cost of sales

 

4,315,333

 

4,534,574

 

14,523,410

 

12,280,124

 

Gross profit

 

118,093

 

82,620

 

270,962

 

228,614

 

 

 

 

 

 

 

 

 

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

27,889

 

22,709

 

79,232

 

66,502

 

Operating expenses

 

46,713

 

40,196

 

137,420

 

100,692

 

Amortization expense

 

4,773

 

1,511

 

13,321

 

5,373

 

Total costs and operating expenses

 

79,375

 

64,416

 

229,973

 

172,567

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

38,718

 

18,204

 

40,989

 

56,047

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(10,855

)

(10,633

)

(32,113

)

(31,811

)

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

27,863

 

7,571

 

8,876

 

24,236

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(2,727

)

(678

)

(852

)

(228

)

 

 

 

 

 

 

 

 

 

 

Net income

 

25,136

 

6,893

 

8,024

 

24,008

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

679

 

 

549

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Global Partners LP

 

25,815

 

6,893

 

8,573

 

24,008

 

 

 

 

 

 

 

 

 

 

 

Less: General partner’s interest in net income, including incentive distribution rights

 

(1,042

)

(316

)

(2,306

)

(733

)

 

 

 

 

 

 

 

 

 

 

Limited partners’ interest in net income

 

$

24,773

 

$

6,577

 

$

6,267

 

$

23,275

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

$

0.91

 

$

0.24

 

$

0.23

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per limited partner unit

 

$

0.91

 

$

0.24

 

$

0.23

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

27,333

 

27,311

 

27,350

 

26,085

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

27,333

 

27,485

 

27,593

 

26,258

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

25,136

 

$

6,893

 

$

8,024

 

$

24,008

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

(945

)

515

 

2,577

 

1,204

 

Change in pension liability

 

1,191

 

373

 

3,216

 

581

 

Total other comprehensive income

 

246

 

888

 

5,793

 

1,785

 

Comprehensive income

 

25,382

 

7,781

 

13,817

 

25,793

 

Comprehensive loss attributable to noncontrolling interest

 

679

 

 

549

 

 

Comprehensive income attributable to Global Partners LP

 

$

26,061

 

$

7,781

 

$

14,366

 

$

25,793

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



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GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

(Restated)

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

8,024

 

$

24,008

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

55,534

 

32,663

 

Amortization of deferred financing fees

 

5,062

 

4,106

 

Amortization of senior notes discount

 

263

 

 

Bad debt expense

 

3,030

 

270

 

Stock-based compensation expense

 

955

 

(20

)

Gain on disposition of property and equipment

 

(1,444

)

(162

)

Curtailment gain

 

 

(469

)

Changes in operating assets and liabilities, exclusive of business combinations:

 

 

 

 

 

Accounts receivable

 

70,202

 

(40,237

)

Accounts receivable – affiliate

 

(189

)

499

 

Inventories

 

237,386

 

81,839

 

Broker margin deposits

 

14,032

 

13,663

 

Prepaid expenses, all other current assets and other assets

 

18,589

 

264

 

Accounts payable

 

(147,359

)

91,708

 

Trustee taxes payable

 

(15,603

)

(7,515

)

Change in fair value of forward fixed price contracts

 

15,472

 

(25,450

)

Accrued expenses, all other current liabilities and other long-term liabilities

 

(9,842

)

14,533

 

Net cash provided by operating activities

 

254,112

 

189,700

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisitions

 

(185,262

)

(181,898

)

Capital expenditures

 

(46,935

)

(30,907

)

Proceeds from sale of property and equipment

 

5,769

 

6,610

 

Net cash used in investing activities

 

(226,428

)

(206,195

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments on working capital revolving credit facility

 

(124,200

)

(161,800

)

(Payments on) borrowings from revolving credit facility

 

(22,300

)

217,000

 

Borrowings from term loan

 

115,000

 

 

Proceeds from senior notes, net of discount

 

67,900

 

 

Repurchase of common units

 

(4,331

)

(2,152

)

Repurchased units withheld for tax obligations

 

(2,086

)

(96

)

Noncontrolling interest capital contribution

 

1,425

 

 

Distributions to partners

 

(50,001

)

(39,712

)

Net cash (used in) provided by financing activities

 

(18,593

)

13,240

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

9,091

 

(3,255

)

Cash and cash equivalents at beginning of period

 

5,977

 

4,328

 

Cash and cash equivalents at end of period

 

$

15,068

 

$

1,073

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

Cash paid during the period for interest

 

$

26,002

 

$

27,720

 

Non-cash investing activities (see Note 18)

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

(In thousands)

(Restated) (Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

General

 

Other

 

 

 

Total

 

 

 

Common

 

Partner

 

Comprehensive

 

Noncontrolling

 

Partners’

 

 

 

Unitholders

 

Interest

 

Loss

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

 $

456,538

 

 $

(407

)

 $

(19,670

)

 $

 

 $

436,461

 

Net income (loss)

 

6,267

 

2,306

 

 

(549

)

8,024

 

Acquisition of noncontrolling interest, at fair value

 

 

 

 

51,000

 

51,000

 

Noncontrolling interest capital contribution

 

 

 

 

1,425

 

1,425

 

Other comprehensive income

 

 

 

5,793

 

 

5,793

 

Stock-based compensation

 

955

 

 

 

 

955

 

Distributions to partners

 

(47,731

)

(2,386

)

 

 

(50,117

)

Repurchase of common units

 

(4,331

)

 

 

 

(4,331

)

Repurchased units withheld for tax obligation

 

(2,086

)

 

 

 

(2,086

)

Phantom unit dividends

 

116

 

 

 

 

116

 

Balance at September 30, 2013

 

 $

409,728

 

 $

(487

)

 $

(13,877

)

 $

51,876

 

 $

447,240

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation

 

Organization

 

Global Partners LP (the “Partnership”) is a publicly traded Delaware master limited partnership formed in March 2005.  As of September 30, 2013, the Partnership had the following wholly owned subsidiaries:  Global Companies LLC, Glen Hes Corp., Global Montello Group Corp. (“GMG”), Chelsea Sandwich LLC, Global Energy Marketing LLC, Alliance Energy LLC, Bursaw Oil LLC, GLP Finance Corp., Global Energy Marketing II LLC, Global CNG LLC and Cascade Kelly Holdings LLC.  Global GP LLC, the Partnership’s general partner (the “General Partner”) manages the Partnership’s operations and activities and employs its officers and substantially all of its personnel, except for its gasoline station and convenience store employees and certain union personnel who are employed by GMG.

 

The Partnership is a midstream logistics and marketing company.  The Partnership is one of the largest distributors of gasoline (including gasoline blendstocks such as ethanol and naphtha), distillates (such as home heating oil, diesel and kerosene), residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York.  The Partnership also engages in the purchasing, selling and logistics of transporting domestic and Canadian crude oil and other products via rail, establishing a “virtual pipeline” from the mid-continent region of the United States and Canada to the East and West Coasts for distribution to refiners and other customers.  The Partnership owns, controls or has access to one of the largest terminal networks of refined petroleum products and renewable fuels in Massachusetts, Maine, Connecticut, Vermont, New Hampshire, Rhode Island, New York, New Jersey and Pennsylvania (collectively, the “Northeast”).  The Partnership also owns and controls terminals in North Dakota and Oregon that extend its origin-to-destination capabilities.  The Partnership is a major multi-brand gasoline distributor and, as of September 30, 2013, had a portfolio of approximately 900 owned, leased and/or supplied gasoline stations primarily in the Northeast.  The Partnership receives revenue from retail sales of gasoline, convenience store sales and gasoline station rental income.  The Partnership is also a distributor of natural gas and propane.  In addition, the Partnership provides ancillary services to companies and receives revenue from these ancillary services.

 

On March 1, 2012, the Partnership acquired from AE Holdings Corp. (“AE Holdings”) 100% of the outstanding membership interests in Alliance Energy LLC (“Alliance”) (see Note 3).  Prior to the closing of the acquisition, Alliance was wholly owned by AE Holdings, which is approximately 95% owned by members of the Slifka family.  No member of the Slifka family owned a controlling interest in AE Holdings, nor currently owns a controlling interest in the General Partner.  Three independent directors of the General Partner’s board of directors serve on a conflicts committee.  The conflicts committee unanimously approved the Alliance acquisition and received advice from its independent counsel and independent financial adviser.

 

On February 1, 2013, the Partnership acquired a 60% membership interest in Basin Transload LLC (“Basin Transload”), and on February 15, 2013, the Partnership acquired 100% of the membership interests in Cascade Kelly Holdings LLC (“Cascade Kelly”).  See Note 3.

 

The General Partner, which holds a 0.83% general partner interest in the Partnership, is owned by affiliates of the Slifka family.  As of September 30, 2013, affiliates of the General Partner, including its directors and executive officers, owned 11,548,902 common units, representing a 42.1% limited partner interest.

 

Basis of Presentation

 

The financial results of Basin Transload for the eight months ended September 30, 2013 and of Cascade Kelly for the seven and one-half months ended September 30, 2013 are included in the accompanying statements of income for the nine months ended September 30, 2013.  The Partnership consolidated the September 30, 2013 balance sheet of Basin Transload because the Partnership controls the entity.  The accompanying consolidated financial statements as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012 reflect the accounts of the Partnership.  All intercompany balances and transactions have been eliminated.

 

7



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation (continued)

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition and operating results for the interim periods.  The interim financial information, which has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 and notes thereto contained in the Partnership’s Annual Report on Form 10-K.  The significant accounting policies described in Note 2, “Summary of Significant Accounting Policies,” of such Annual Report on Form 10-K are the same used in preparing the accompanying consolidated financial statements.

 

The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2013.  The consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Due to the nature of the Partnership’s business and its customers’ reliance, in part, on consumer travel and spending patterns, the Partnership may experience more demand for gasoline and gasoline blendstocks during the late spring and summer months than during the fall and winter.  Travel and recreational activities are typically higher in these months in the geographic areas in which the Partnership operates, increasing the demand for gasoline and gasoline blendstocks that the Partnership distributes.  Therefore, the Partnership’s volumes in gasoline and gasoline blendstocks are typically higher in the second and third quarters of the calendar year.  As demand for some of the Partnership’s refined petroleum products, specifically home heating oil and residual oil for space heating purposes, is generally greater during the winter months, heating oil and residual oil sales are generally higher during the first and fourth quarters of the calendar year.  These factors may result in significant fluctuations in the Partnership’s quarterly operating results.

 

Noncontrolling Interest

 

These financial statements reflect the application of ASC 810, “Consolidations” (“ASC 810”) which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.

 

The Partnership acquired a 60% interest in Basin Transload on February 1, 2013.  After evaluating ASC 810, the Partnership concluded it is appropriate to consolidate the balance sheet and statement of operations of Basin Transload based on an evaluation of the outstanding voting interests.  Amounts pertaining to the noncontrolling ownership interest held by third parties in the financial position and operating results of the Partnership are reported as a noncontrolling interest in the accompanying consolidated balance sheet and statement of income.

 

Reclassification

 

Amortization expense of deferred financing fees has been reclassified from selling, general and administrative expenses to interest expense.

 

8



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.                     Organization and Basis of Presentation (continued)

 

Concentration of Risk

 

The following table presents the Partnership’s product sales as a percentage of total sales for the periods presented:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Gasoline sales: gasoline and gasoline blendstocks such as ethanol and naphtha

 

65%

 

76%

 

59%

 

70%

 

Distillates (home heating oil, diesel and kerosene), residual oil, crude oil, natural gas and propane sales

 

35%

 

24%

 

41%

 

30%

 

Total

 

100%

 

100%

 

100%

 

100%

 

 

The Partnership had two significant customers, ExxonMobil Corporation (“ExxonMobil”) and Phillips 66 (“Phillips 66”), which accounted for approximately 18% and 11%, respectively, of total sales for the three months ended September 30, 2013, and approximately 15% and 14% respectively, of total sales for the nine months ended September 30, 2013.  The Partnership had one significant customer, ExxonMobil, which accounted for approximately 16% and 16% of total sales for the three and nine months ended September 30, 2012, respectively.

 

Note 2.                     Restatement

 

The Partnership is restating its unaudited consolidated financial statements primarily to reflect a correction in its accounting for Renewable Identification Numbers (“RINs”).  A RIN is a serial number assigned to a batch of biofuel for the purpose of tracking its production, use, and trading as required by the Environmental Protection Agency’s (“EPA”) Renewable Fuel Standard that originated with the Energy Policy Act of 2005.  To evidence that the required volume of renewable fuel is blended with gasoline, obligated parties must retire sufficient RINs to cover their Renewable Volume Obligation (“RVO”).  The Partnership’s EPA obligations relative to renewable fuel reporting are largely limited to the foreign gasoline that the Partnership may choose to import.  As a wholesaler of transportation fuels through its terminals, the Partnership separates RINs from renewable fuel through blending with gasoline and can use those separated RINs to settle its RVO.  While the annual compliance period for a RVO is a calendar year, the settlement of the RVO can occur, under certain deferral elections, more than one year after the close of the compliance period.

 

In connection with the year ended December 31, 2013 financial statement close process, certain misstatements were identified related to the Partnership’s accounting for the RVO, RIN inventory and the mark to market loss related to RIN forward commitments.  The Partnership has corrected its accounting for RINs, which included the recognition of a mark-to-market liability associated with the RVO deficiency at period end (the “RVO Deficiency”).  At September 30, 2013, the Partnership’s RVO Deficiency was $22.6 million, the mark to market loss related to RIN forward commitments was $6.6 million and the reduction in previously reported RIN inventory was $4.8 million.  The Partnership is restating its consolidated balance sheet at September 30, 2013 and the results of operations for the three and nine months ended September 30, 2013 to reflect in the proper period the impact of these accounting corrections.  The impact of these corrections was to increase net income by $15.0 million for the three months ended September 30, 2013, and to decrease net income by 29.9 million for the nine months ended September 30, 2013.

 

Additionally, the Partnership determined that at September 30, 2013, certain accrued liabilities related to the procurement of petroleum products were no longer warranted.  The Partnership is restating its consolidated balance sheet at September 30, 2013 and results of operations for the three and nine months then ended to reflect the correction of the timing of the relief of these accrued liabilities at that date.  The impact of these corrections was $5.4 million and $10.8 million of additional income for the three and nine months ended September 30, 2013.

 

9



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Restatement (continued)

 

The Partnership has also corrected other items that individually and in the aggregate are immaterial to the Partnership’s operating results.  The more significant of these items include a correction to the Partnership’s business combination accounting related to a 2013 acquisition and an income statement classification error related to the Partnership’s presentation of amortization of deferred financing fees.

 

As a result, the Partnership has restated its unaudited consolidated financial statements to reflect these corrections as of and for the three and nine months ended September 30, 2013.  These corrections had no impact on the Partnership’s previously reported net cash provided by operating activities, net cash provided by investing activities or net cash used in financing activities.

 

The following is a summary of the adjustments to the Partnership’s previously issued unaudited consolidated balance sheet as of September 30, 2013 (in thousands):

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Assets

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

781,800

 

$

(155,971

) (d)(e)

 

$

625,829

 

Inventories

 

$

402,221

 

$

(4,809

) (a)

 

$

397,412

 

Total current assets

 

$

1,319,871

 

$

(160,780

) (a)(d)(e)

 

$

1,159,091

 

Intangible assets, net

 

$

129,755

 

$

(56,092

) (c)

 

$

73,663

 

Goodwill

 

$

58,890

 

$

59,500

  (c)

 

$

118,390

 

Total assets

 

$

2,364,641

 

$

(157,372

) (a)(c)(d)(e)

 

$

2,207,269

 

 

 

 

 

 

 

 

 

 

Liabilities and partners’ equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

769,693

 

$

(154,600

) (d)

 

$

615,093

 

Accrued expenses and other current liabilities

 

$

46,403

 

$

14,218

  (b)(f)(g)

 

$

60,621

 

Total current liabilities

 

$

1,050,143

 

$

(140,382

) (b)(d)(f)(g)

 

$

909,761

 

Total liabilities

 

$

1,900,411

 

$

(140,382

) (b)(d)(f)(g)

 

$

1,760,029

 

 

 

 

 

 

 

 

 

 

Partners’ equity

 

 

 

 

 

 

 

 

Common unitholders

 

$

427,929

 

$

(18,201

)

 

$

409,728

 

General partner interest

 

$

(335

)

$

(152

) (j)

 

$

(487

)

Total Global Partners LP equity

 

$

413,717

 

$

(18,353

)

 

$

395,364

 

Noncontrolling interest

 

$

50,513

 

$

1,363

  (i)

 

$

51,876

 

Total partners’ equity

 

$

464,230

 

$

(16,990

)

 

$

447,240

 

Total liabilities and partners’ equity

 

$

2,364,641

 

$

(157,372

)

 

$

2,207,269

 

 

10



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Restatement (continued)

 

The following is a summary of the adjustments to the Partnership’s previously issued unaudited consolidated statement of income for the three and nine months ended September 30, 2013, the most significant of which relates to an aggregate of RIN adjustments totaling $15.0 million (income) and $29.9 million (expense) for the three and nine months ended September 30, 2013 (see footnotes (a)(f)(g)) (in thousands, except per unit data):

 

 

 

Three Months Ended September 30, 2013

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Cost of sales

 

$

4,337,146

 

$

(21,813

) (a)(b)(f)(g)(h)

 

$

4,315,333

 

Gross profit

 

$

96,280

 

$

21,813

  (a)(b)(f)(g)(h)

 

$

118,093

 

Selling, general and administrative expenses

 

$

29,086

 

$

(1,197

) (e)

 

$

27,889

 

Amortization

 

$

6,676

 

$

(1,903

) (c)

 

$

4,773

 

Total operating expenses

 

$

82,475

 

$

(3,100

) (c)(e)

 

$

79,375

 

Operating income

 

$

13,805

 

$

24,913

  (a)(b)(c)(e)(f)(g)(h)

 

$

38,718

 

Interest expense

 

$

(9,111

)

$

(1,744

) (e)

 

$

(10,855

)

Income before income taxes

 

$

4,694

 

$

23,169

  (a)(b)(c)(e)(f)(g)(h)

 

$

27,863

 

Net income

 

$

1,967

 

$

23,169

  (a)(b)(c)(e)(f)(g)(h)

 

$

25,136

 

Net loss attributable to noncontrolling interest

 

$

1,440

 

$

(761

) (i)

 

$

679

 

Net income attributable to Global Partners LP

 

$

3,407

 

$

22,408

 

 

$

25,815

 

General partner’s interest in net income, including incentive distribution rights

 

$

(856

)

$

(186

) (j)

 

$

(1,042

)

Limited partners’ interest in net income

 

$

2,551

 

$

22,222

 

 

$

24,773

 

Basic net income per limited partner unit

 

$

0.09

 

$

0.82

 

 

$

0.91

 

Diluted net income per limited partner unit

 

$

0.09

 

$

0.82

 

 

$

0.91

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Cost of sales

 

$

14,504,383

 

$

19,027

  (a)(b)(f)(g)(h)

 

$

14,523,410

 

Gross profit

 

$

289,989

 

$

(19,027

) (a)(b)(f)(g)(h)

 

$

270,962

 

Selling, general and administrative expenses

 

$

82,923

 

$

(3,691

) (e)

 

$

79,232

 

Amortization

 

$

16,729

 

$

(3,408

) (c)

 

$

13,321

 

Total operating expenses

 

$

237,072

 

$

(7,099

) (c)(e)

 

$

229,973

 

Operating income

 

$

52,917

 

$

(11,928

) (a)(b)(c)(e)(f)(g)(h)

 

$

40,989

 

Interest expense

 

$

(27,051

)

$

(5,062

) (e)

 

$

(32,113

)

Income before income taxes

 

$

25,866

 

$

(16,990

) (a)(b)(c)(e)(f)(g)(h)

 

$

8,876

 

Net income

 

$

25,014

 

$

(16,990

) (a)(b)(c)(e)(f)(g)(h)

 

$

8,024

 

Net loss attributable to noncontrolling interest

 

$

1,912

 

$

(1,363

) (i)

 

$

549

 

Net income attributable to Global Partners LP

 

$

26,926

 

$

(18,353

)

 

$

8,573

 

General partner’s interest in net income, including incentive distribution rights

 

$

(2,458

)

$

152

  (j)

 

$

(2,306

)

Limited partners’ interest in net income

 

$

24,468

 

$

(18,201

)

 

$

6,267

 

Basic net income per limited partner unit

 

$

0.89

 

$

(0.66

)

 

$

0.23

 

Diluted net income per limited partner unit

 

$

0.89

 

$

(0.66

)

 

$

0.23

 

 

11



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Restatement (continued)

 

The following is a summary of the adjustments to the Partnership’s previously issued unaudited consolidated statement of comprehensive income for the three and nine months ended September 30, 2013, the most significant of which relates to an aggregate of RIN adjustments totaling $15.0 million (income) and $29.9 million (expense) for the three and nine months ended September 30, 2013 (see footnote (a)(f)(g)) (in thousands):

 

 

 

Three Months Ended September 30, 2013

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Net income

 

$

1,967

 

$

23,169

 

$

25,136

 

Comprehensive income

 

$

2,213

 

$

23,169

 

$

25,382

 

Comprehensive loss attributable to noncontrolling interest

 

$

1,440

 

$

(761)

 

$

679

 

Comprehensive income (loss) attributable to Global Partners LP

 

$

3,653

 

$

22,408

 

$

26,061

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Net income

 

$

25,014

 

$  (16,990)

 

$

8,024

 

Comprehensive income

 

$

30,807

 

$  (16,990)

 

$

13,817

 

Comprehensive loss attributable to noncontrolling interest

 

$

1,912

 

$    (1,363)

 

$

549

 

Comprehensive income attributable to Global Partners LP

 

$

32,719

 

$  (18,353)

 

$

14,366

 

 

The following is a summary of the adjustments to the Partnership’s previously issued unaudited consolidated statement of cash flows for the nine months ended September 30, 2013, the most significant of which relates to an aggregate of RIN adjustments totaling $29.9 million (expense) for the nine months ended September 30, 2013 (see footnote (a)(f)(g)) (in thousands):

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

Net income

 

$

25,014

 

$

(16,990)

 

$

8,024

 

Depreciation and amortization

 

$

58,942

 

$

(3,408)

 

$

55,534

 

Bad debt expense

 

$

1,659

 

$

1,371

 

$

3,030

 

Accounts receivable

 

$

(84,398

)

$

154,600

 

$

70,202

 

Inventories

 

$

232,577

 

$

4,809

 

$

237,386

 

Accounts payable

 

$

7,241

 

$

(154,600)

 

$

(147,359

)

Accrued expenses, all other current liabilities and other long-term liabilities

 

$

(24,060

)

$

14,218

 

$

(9,842

)

Net cash provided by operating activities

 

254,112

 

 

254,112

 

 


(a)         To reduce previously reported inventory for the nine months ended September 30, 2013 by approximately $4.8 million (expense). The impact of adjusting previously reported RIN inventory in prior quarters resulted in a $9.0 million increase in net income for the three months ended September 30, 2013.

(b)         To reduce accrued liabilities related to the procurement of petroleum products by approximately $5.4 million (income) and $10.8 million (income) for the three and nine months ended September 30, 2013 for accruals determined to no longer be warranted at the end of the reporting period.

 

12



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 2.                     Restatement (continued)

 

(c)          To correct the valuation of customer relationships and related amortization expense on such assets acquired in connection with the February 1, 2013 acquisition of a 60% membership interest in Basin Transload LLC.  Specifically, the reduction in the value of customer relationships reflects the reversal of a customer relationship that was determined to not meet the criteria of a capitalizable intangible asset and, separately, a reduction in the cash flow period for another customer relationship that should have been considered at the date of acquisition. The difference in the amortization expense for the three and nine months ended September 30, 2013 of $1.9 million and $3.4 million, respectively, reflects the reduction in the value of customer relationships acquired of $52.0 million and the reduction in the economic useful life of the remaining assets from five to two years.

(d)         To reduce accounts receivable by $154.6 million and accounts payable by $154.6 million which reflect the netting of positive and negative product exchange balances with the same counterparty which has a right of offset.

(e)          Other adjustments to operating expenses include an increase to the allowance for doubtful accounts of $547,000 and $1.4 million for the three and nine months ended September 30,2013, respectively and an income statement reclassification of amortization of deferred financing fees from selling, general and administrative expenses to interest expense of $1.7 million and $5.1 million for the three and nine months ended September 30, 2013, respectively.

(f)           To record the change in the RVO Deficiency of approximately $13.5 million (expense) and $22.6 million (expense) at the end of the reporting period for the three and nine months ended September 30, 2013, respectively.

(g)          To record the change in the liability related to the losses on RIN forward commitments of $19.5 million (income) and $2.6 million (expense) for the three and nine months ended September 30, 2013.

(h)         Other adjustments to costs of sales include a $1.3 million (income) and $0.0 million fair value of oil related forward fixed price contracts for the three and nine months ended September 30, 2013.

(i)             Represents impact of all adjustments to the net loss attributable to the non-controlling interest of $761,000 (expense) and $1.4 million (expense), respectively.

(j)            Represents impact of all adjustments to the General Partner’s interest in net income of $186,000 (income) and $152,000 (expense), respectively.

 

 

2013 Acquisitions

 

Acquisition of Basin Transload LLC

 

On February 1, 2013, the Partnership acquired a 60% membership interest in Basin Transload, which operates two transloading facilities in Columbus and Beulah, North Dakota for crude oil and other products, with a combined rail loading capacity of 160,000 barrels per day.  The purchase price, including expenditures related to certain capital expansion projects, was approximately $91.1 million which the Partnership financed with borrowings under its credit facility.

 

13



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Business Combinations

 

The acquisition was accounted for using the purchase method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations.  The Partnership’s financial statements include the results of operations of its membership interest in Basin Transload subsequent to the acquisition date.

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including a final valuation of the assets purchased, including tangible and intangible assets, and liabilities assumed.

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Assets purchased:

 

 

 

Accounts receivable

 

$

2,003

 

Prepaid expenses

 

68

 

Property and equipment

 

29,112

 

Intangibles

 

26,162

 

Total identifiable assets purchased

 

57,345

 

Liabilities assumed:

 

 

 

Accounts payable

 

(1,326

)

Total liabilities assumed

 

(1,326

)

Net identifiable assets acquired

 

56,019

 

Noncontrolling interest

 

(51,000

)

Goodwill

 

86,064

 

Net assets acquired

 

$

91,083

 

 

The Partnership engaged a third-party valuation firm to assist in the valuation of the Partnership’s interest in Basin Transload’s property and equipment, intangible assets and noncontrolling interest.  During the quarter ended September 30, 2013, the Partnership recorded certain changes to the preliminary purchase accounting, primarily related to the values assigned to property and equipment, intangibles and the noncontrolling interest based on a preliminary valuation received from a third-party valuation firm.  The impact of these changes increased goodwill from $76.1 million at June 30, 2013 to $86.1 million at September 30, 2013.

 

The Partnership’s third party valuation firm primarily used the replacement cost methodology to value property and equipment, adjusted for depreciation associated with the age and estimated condition of the assets.  The income approach was used to value the intangible assets, which consist principally of customer relationships.

 

The fair value of the noncontrolling interest was developed by a third-party valuation firm based on the fair value of the acquired business as a whole, reduced by the consideration paid by management to obtain control.  This fair value of the business was estimated based on the fair value of Basin Transload’s net assets and applying a reasonable control premium.

 

The fair values of the remaining Basin Transload assets and liabilities noted above approximate their carrying values at February 1, 2013.  The Partnership is completing its review of the preliminary values received from the third-party valuation firm with a particular emphasis on assessing the appropriate number of years of cash flows used to value the intangible assets given the nature of the industry.  It is possible that once the Partnership receives the completed valuations on the property and equipment, intangible assets and noncontrolling interest, the final purchase price accounting may be different than what is presented above.

 

14



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Business Combinations (continued)

 

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon on their estimates and assumptions.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset.  These factors include, in part, a review of the expected use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset.  The Partnership amortizes these intangible assets over their estimated useful lives which is consistent with the estimated undiscounted future cash flows of these assets.

 

As part of the purchase price allocation, identifiable intangible assets include customer relationships that are being amortized over two years.  Amortization expense amounted to $3.0 million and $8.0 million for the three and nine months ended September 30, 2013, respectively.  The following table presents the estimated remaining amortization expense for intangible assets acquired in connection with the acquisition (in thousands):

 

2013 (10/1/13 – 12/31/13)

 

$

2,978

2014

 

12,111

2015

 

2,969

Total

 

$

18,058

 

The $86.1 million of goodwill was assigned to the Wholesale reporting unit.  The goodwill recognized is attributed to the unique origin of the acquired locations through which the Partnership’s customers can efficiently supply cost-competitive crude oil to destinations on the East and West Coasts.  The goodwill is deductible for income tax purposes.

 

Acquisition of Cascade Kelly Holdings LLC

 

On February 15, 2013, the Partnership acquired 100% of the membership interests in Cascade Kelly, which owns a West Coast crude oil and ethanol facility near Portland, Oregon.  The total cash purchase price was approximately $94.2 million which the Partnership funded with borrowings under its credit facility and with proceeds from the issuance of the Partnership’s unsecured 8.00% senior notes due 2018 (see Note 7).  The transaction includes a rail transloading facility serviced by the Burlington Northern Santa Fe Railway, 200,000 barrels of storage capacity, a deepwater marine terminal with access to a 1,200-foot leased dock and the largest ethanol plant on the West Coast.  Situated along the Columbia River in Clatskanie, Oregon, the site is located on land leased under a long-term agreement from the Port of St. Helens.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the FASB’s guidance regarding business combinations.  The Partnership’s financial statements include the results of operations of Cascade Kelly subsequent to the acquisition date.

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including a final valuation of the assets purchased, including tangible and intangible assets, and liabilities assumed.

 

15



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Business Combinations (continued)

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Assets purchased:

 

 

 

Accounts receivable

 

$

296

 

Inventory

 

131

 

Prepaid expenses

 

96

 

Property and equipment

 

96,591

 

Total identifiable assets purchased

 

97,114

 

Liabilities assumed:

 

 

 

Accounts payable

 

(1,428

)

Other current liabilities

 

(1,507

)

Total liabilities assumed

 

(2,935

)

Net identifiable assets acquired

 

$

94,179

 

 

Management is in the process of finalizing the purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of Cascade Kelly’s property and equipment, and the preliminary estimate of fair value is $96.6 million.  During the quarter ended September 30, 2013, the Partnership recorded certain changes to the preliminary purchase accounting, primarily related to the values assigned to property and equipment based on a preliminary valuation received from a third-party valuation firm.  The impact of these changes decreased goodwill from $51.1 million at June 30, 2013 to $0 at September 30, 2013.

 

During the preliminary stage of evaluating the purchase price accounting, the estimated fair value of property and equipment developed by management and used in the determination of the acquisition price was based on management’s acquisition history and on the crude oil facility.  In the third quarter, the Partnership’s third-party valuation firm completed inspections of the crude oil and ethanol fixed assets and prepared a preliminary valuation which began with quantifying the replacement cost of the acquired assets.  The level of physical depreciation and other forms of depreciation was then quantified and deducted from the replacement cost to arrive at the fair value of the assets.  The impact of the valuation was to increase property and equipment by $51.5 million.  Management attributed the increase to the completion of the valuation by the third-party valuation firm, which concluded that the fair value of the ethanol assets is more favorable than originally anticipated.  The Partnership continues to review the assumptions used in valuing the crude oil and ethanol fixed assets, with a particular focus on the adjustments made between replacement cost and fair value.

 

The Partnership expects to make the capital improvements necessary to place the ethanol plant into service; therefore, as of September 30, 2013, the fair value of the ethanol plant is included in construction in process.  After the plant has been successfully placed into service, depreciation will commence.

 

It is possible that once the Partnership receives the completed valuations on the property and equipment, the final purchase price accounting may be different than what is presented above.

 

The fair values of the remaining Cascade Kelly assets and liabilities noted above approximate their carrying values at February 15, 2013.

 

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, if any, based upon on their estimates and assumptions.

 

16



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Business Combinations (continued)

 

2012 Acquisition

 

Alliance Energy LLCOn March 1, 2012, pursuant to a Contribution Agreement between the Partnership and AE Holdings (the “Contribution Agreement”), the Partnership acquired from AE Holdings 100% of the outstanding membership interests in Alliance, a gasoline distributor and operator of gasoline stations and convenience stores.  The aggregate purchase price of the acquisition was approximately $312.4 million, consisting of both cash and non-cash components.  Alliance was an affiliate of the Partnership as Alliance was owned by AE Holdings which is approximately 95% owned by members of the Slifka family.  Both the Partnership and Alliance shared certain common directors.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the FASB’s guidance regarding business combinations.  The Partnership’s financial statements include the results of operations of Alliance subsequent to the acquisition date.

 

The purchase price includes cash consideration of $181.9 million which was funded by the Partnership through additional borrowings under its revolving credit facility.  The consideration also includes the issuance of 5,850,000 common units representing limited partner interests in the Partnership which had a fair value of $22.31 per unit on March 1, 2012, resulting in equity consideration of $130.5 million.

 

The purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values with the exception of environmental liabilities which were recorded on an undiscounted basis (see Note 12).  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon a valuation from an independent third party.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill and assigned to the Gasoline Distribution and Station Operations reporting unit.

 

Goodwill — The following table presents a summary roll forward of the Partnership’s goodwill at September 30, 2013 (in thousands):

 

 

 

Goodwill at

 

 

 

Goodwill at

 

 

 

December 31,

 

2013

 

September 30,

 

 

 

2012

 

Additions

 

2013

 

Acquisition of Alliance (1)

 

$

31,151

 

$

 

$

31,151

 

Acquisition of gasoline stations from Mutual Oil Company (1)

 

1,175

 

 

1,175

 

Acquisition of 60% interest in Basin Transload (2)

 

 

86,064

 

86,064

 

Total

 

$

32,326

 

$

86,064

 

$

118,390

 

 


(1)                Goodwill allocated to the Gasoline Distribution and Station Operations reporting unit

(2)                Goodwill allocated to the Wholesale reporting unit

 

17



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 3.                     Business Combinations (continued)

 

Supplemental Pro-Forma Information — Revenues and net income included in the Partnership’s consolidated operating results for Basin Transload from January 1, 2013 to February 1, 2013, the acquisition date, and for Cascade Kelly from January 1, 2013 to February 15, 2013, the acquisition date, were immaterial.  Accordingly, the supplemental pro-forma information for the nine months ended September 30, 2013 is consistent with the amounts reported in the accompanying statement of income for the nine months ended September 30, 2013.

 

The following unaudited pro-forma information presents the consolidated results of operations of the Partnership as if the acquisitions of Basin Transload, Cascade Kelly and Alliance occurred at the beginning of the period presented, with pro-forma adjustments to give effect to intercompany sales and certain other adjustments (in thousands, except per unit data):

 

 

 

Nine Months Ended

 

 

 

September 30, 2012

 

 

 

 

 

Sales

 

$

12,758,170

 

Net loss

 

$

(4,194

)

Net loss per limited partner unit, basic and diluted

 

$

(0.17

)

 

The Partnership’s 60% interest in Basin Transload’s sales and net loss included in the Partnership’s consolidated operating results from February 1, 2013, the acquisition date, through the period ended September 30, 2013 were $6.4 million and $2.9 million, respectively.  Cascade Kelly’s sales and net loss included in the Partnership’s consolidated operating results from February 15, 2013, the acquisition date, through the period ended September 30, 2013 were $7.7 million and $1.3 million, respectively.

 

Note 4.                     Net Income Per Limited Partner Unit

 

Under the Partnership’s partnership agreement, for any quarterly period, the incentive distribution rights (“IDRs”) participate in net income only to the extent of the amount of cash distributions actually declared, thereby excluding the IDRs from participating in the Partnership’s undistributed net income or losses.  Accordingly, the Partnership’s undistributed net income is assumed to be allocated to the common unitholders, or limited partners’ interest, and to the General Partner’s general partner interest.

 

At September 30, 2013 and December 31, 2012, common units outstanding as reported in the accompanying consolidated financial statements excluded 162,316 and 119,915 common units, respectively, held on behalf of the Partnership pursuant to its repurchase program (see Note 13).  These units are not deemed outstanding for purposes of calculating net income per limited partner unit (basic and diluted).

 

18



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 4.                     Net Income Per Limited Partner Unit (continued)

 

The following table provides a reconciliation of net income and the assumed allocation of net income to the limited partners’ interest for purposes of computing net income per limited partner unit for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per unit data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2013

 

 

Three Months Ended September 30, 2012

 

Numerator:

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Net income attributable to Global Partners LP

 

$

25,815

 

$

24,773

 

$

1,042

 

$

 

 

$

6,893

 

$

6,577

 

$

316

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

$

17,425

 

$

16,459

 

$

138

 

$

828

 

 

$

15,019

 

$

14,607

 

$

122

 

$

290

 

Assumed allocation of undistributed net income

 

8,390

 

8,314

 

76

 

 

 

(8,126

)

(8,030

)

(96

)

 

Assumed allocation of net income

 

$

25,815

 

$

24,773

 

$

214

 

$

828

 

 

$

6,893

 

$

6,577

 

$

26

 

$

290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

 

27,333

 

 

 

 

 

 

 

 

27,311

 

 

 

 

 

Dilutive effect of phantom units

 

 

 

 

 

 

 

 

 

 

 

 

174

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

 

27,333

 

 

 

 

 

 

 

 

27,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

 

$

0.91

 

 

 

 

 

 

 

 

$

0.24

 

 

 

 

 

Diluted net income per limited partner unit (1)

 

 

 

$

0.91

 

 

 

 

 

 

 

 

$

0.24

 

 

 

 

 

 


(1)             Basic units were used to calculate diluted net income per limited partner unit for the three months ended September 30, 2013 as using the effects of the phantom units would have an anti-dilutive effect on income per limited partner unit.

 

19



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 4.                     Net Income Per Limited Partner Unit (continued)

 

 

 

Nine Months Ended September 30, 2013

 

 

Nine Months Ended September 30, 2012

 

Numerator:

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

 

Total

 

Limited
Partner
Interest

 

General
Partner
Interest

 

IDRs

 

Net income attributable to Global Partners LP (1)

 

$

8,573

 

$

6,267

 

$

2,306

 

$

 

 

$

24,008

 

$

23,275

 

$

733

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared distribution

 

$

51,196

 

$

48,554

 

$

407

 

$

2,235

 

 

$

43,786

 

$

42,724

 

$

358

 

$

704

 

Adjustment to distribution in connection with the Alliance acquisition (2)

 

 

 

 

 

 

(1,929

)

(1,929

)

 

 

Adjusted declared distribution

 

51,196

 

48,554

 

407

 

2,235

 

 

41,857

 

40,795

 

358

 

704

 

Assumed allocation of undistributed net income

 

(42,623

)

(42,287

)

(336

)

 

 

(17,849

)

(17,520

)

(329

)

 

Assumed allocation of net income

 

$

8,573

 

$

6,267

 

$

71

 

$

2,235

 

 

$

24,008

 

$

23,275

 

$

29

 

$

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average limited partner units outstanding

 

 

 

27,350

 

 

 

 

 

 

 

 

26,085

 

 

 

 

 

Dilutive effect of phantom units

 

 

 

243

 

 

 

 

 

 

 

 

 

173

 

 

 

 

 

Diluted weighted average limited partner units outstanding

 

 

 

27,593

 

 

 

 

 

 

 

 

26,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per limited partner unit

 

 

 

$

0.23

 

 

 

 

 

 

 

 

$

0.89

 

 

 

 

 

Diluted net income per limited partner unit

 

 

 

$

0.23

 

 

 

 

 

 

 

 

$

0.89

 

 

 

 

 

 

(1)          Calculation includes the effect of the March 1, 2012 issuance of 5,850,000 common units in connection with the acquisition of Alliance.  As a result, the general partner interest was 0.83% for the nine months ended September 30, 2013 and, based on a weighted average, 0.87% for the nine months ended September 30, 2012.

(2)          In connection with the acquisition of Alliance on March 1, 2012 and the issuance of 5,850,000 common units, the Contribution Agreement provided that any declared distribution for the first quarter of 2012 reflect the seller’s actual period of ownership during that quarter.  The payment by the seller of $1.9 million reflects the timing of the transaction (March 1), the seller’s 31 days of actual unit ownership in the 91 days of the quarter and the net receipt by seller ($1.0 million) of a pro-rated portion of the quarterly cash distribution of $0.50 per unit paid on the issued 5,850,000 common units.

 

On April 24, 2013, the board of directors of the General Partner declared a quarterly cash distribution of $0.5825 per unit for the period from January 1, 2013 through March 31, 2013.  On July 23, 2013, the board of directors of the General Partner declared a quarterly cash distribution of $0.5875 per unit for the period from April 1, 2013 through June 30, 2013.  On October 23, 2013, the board of directors of the General Partner declared a quarterly cash distribution of $0.60 per unit for the period from July 1, 2013 through September 30, 2013.  These declared cash distributions result in incentive distributions to the General Partner, as the holder of the IDRs, and enable the Partnership to exceed its second target level distribution with respect to such IDRs.  See Note 9, “Cash Distributions” for further information.

 

20



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 5.                     Inventories

 

Except for its convenience store inventory and its RIN inventory, the Partnership hedges substantially all of its inventory, primarily through futures contracts.  These futures contracts are entered into when inventory is purchased and are designated as fair value hedges against the inventory on a specific barrel basis.  Changes in the fair value of these contracts, as well as the offsetting gain or loss on the hedged inventory item, are recognized in earnings as an increase or decrease in cost of sales.  All hedged inventory is valued using the lower of cost, as determined by specific identification, or market.  Prior to sale, hedges are removed from specific barrels of inventory, and the then unhedged inventory is sold and accounted for on a first-in, first-out basis.  In addition, the Partnership has convenience store inventory and RIN inventory which are carried at the lower of historical cost or market.  Inventory from Cascade Kelly was nominal at September 30, 2013 and is carried at the lower of cost or market.

 

Inventories consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Distillates: home heating oil, diesel and kerosene

 

$

165,561

 

$

235,029

 

Gasoline

 

82,061

 

144,269

 

Gasoline blendstocks

 

36,875

 

119,932

 

Renewable identification numbers (RINs)

 

5,854

 

19,384

 

Crude oil

 

60,837

 

80,273

 

Residual oil

 

36,649

 

29,150

 

Propane and other

 

2,411

 

 

Convenience store inventory

 

7,164

 

6,630

 

Total

 

$

397,412

 

$

634,667

 

 

In addition to its own inventory, the Partnership has exchange agreements for petroleum products with unrelated third-party suppliers, whereby it may draw inventory from these other suppliers and suppliers may draw inventory from the Partnership.  Positive exchange balances are accounted for as accounts receivable and amounted to $49.2 million and $120.9 million at September 30, 2013 and December 31, 2012, respectively.  Negative exchange balances are accounted for as accounts payable and amounted to $40.4 million and $139.5 million at September 30, 2013 and December 31, 2012, respectively.  Exchange transactions are valued using current carrying costs.

 

Note 6.                     Derivative Financial Instruments

 

Accounting and reporting guidance for derivative instruments and hedging activities requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure the instruments at fair value.  Changes in the fair value of the derivative are to be recognized currently in earnings, unless specific hedge accounting criteria are met.  The Partnership principally uses derivative instruments to hedge the commodity risk associated with its inventory and product purchases and sales and to hedge variable interest rates associated with the Partnership’s credit facilities.

 

21



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 6.                     Derivative Financial Instruments (continued)

 

The following table presents the volume of activity related to the Partnership’s derivative financial instruments at September 30, 2013:

 

 

 

Units (1)

 

 

Unit of Measure

 

 

 

 

 

 

 

 

 

 

Futures Contracts

 

 

 

 

 

 

 

Long

 

19,639

 

 

Thousands of barrels

 

 

Short

 

(23,968

)

 

Thousands of barrels

 

 

 

 

 

 

 

 

 

 

Natural Gas Contracts

 

 

 

 

 

 

 

Long

 

7,481

 

 

Thousands of decatherms

 

 

Short

 

(7,481

)

 

Thousands of decatherms

 

 

 

 

 

 

 

 

 

 

Interest Rate Collar

$

100.0

 

 

Millions of U.S. dollars

 

 

Interest Rate Swap

$

100.0

 

 

Millions of U.S. dollars

 

 

Interest Rate Cap

$

100.0

 

 

Millions of U.S. dollars

 

 

 

 

 

 

 

 

 

 

Foreign Currency Derivatives

 

 

 

 

 

 

 

Open Forward Exchange Contracts (2)

$

23.8

 

 

Millions of Canadian dollars

 

 

 

$

23.1

 

 

Millions of U.S. dollars

 

 

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

(2)          All-in forward rate Canadian dollars (“CAD”) $1.0311 to USD $1.00.

 

Fair Value Hedges

 

The Partnership enters into futures contracts in the normal course of business to reduce the risk of loss of inventory value, which could result from fluctuations in market prices.  These futures contracts are designated as fair value hedges against the inventory with specific futures contracts matched to specific barrels of inventory.  As a result of the Partnership’s hedge designation on these transactions, the futures contracts are recorded on the Partnership’s consolidated balance sheet and marked to market through the use of independent markets based on the prevailing market prices of such instruments at the date of valuation.  Likewise, the underlying inventory being hedged is also marked to market.  Changes in the fair value of the futures contracts, as well as the change in the fair value of the hedged inventory, are recognized in the consolidated statement of income through cost of sales.  These futures contracts are settled on a daily basis by the Partnership through brokerage margin accounts.

 

The Partnership’s futures contracts are settled daily; therefore, there was no corresponding asset or liability on the Partnership’s consolidated balance sheet related to these contracts at September 30, 2013 and December 31, 2012.  These contracts remain open until their contract end date.  The daily settlement of these futures contracts is accomplished through the use of brokerage margin deposit accounts.

 

22



Table of Contents

 

GLOBAL PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 6.                     Derivative Financial Instruments (continued)

 

The following table presents the hedge ineffectiveness from derivatives involved in fair value hedging relationships recognized in the Partnership’s consolidated statements of income for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

 

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

 

 

Income on Derivatives

 

 

 

Location of Gain (Loss)

 

Three Months Ended

 

Nine Months Ended

 

Derivatives in Fair Value

 

Recognized in

 

September 30,

 

September 30,

 

Hedging Relationships

 

Income on Derivative

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts

 

Cost of sales

 

$

(4,348

)

$

(100,666

)

$

15,753

 

$

(110,114

)

 

 

 

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

 

 

Income on Hedged Items

 

 

 

Location of Gain (Loss)

 

Three Months Ended

 

Nine Months Ended

 

Hedged Items in Fair Value

 

Recognized in

 

September 30,

 

September 30,

 

Hedged Relationships

 

Income on Hedged Items

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

Cost of sales

 

$

4,545

 

$

100,765

 

$

(15,033

)

$

110,368

 

 

Cash Flow Hedges

 

The Partnership utilizes various interest rate derivative instruments to hedge variable interest rate on its debt.  These derivative instruments are designated as cash flow hedges of the underlying debt.  To the extent such hedges are effective, the changes in the fair value of the derivative instrument are reported as a component of other comprehensive income (loss) and reclassified into interest expense or interest income in the same period during which the hedged transaction affects earnings.

 

In September 2008, the Partnership executed a zero premium interest rate collar with a major financial institution.  The collar, which became effective on October 2, 2008 and expired on October 2, 2013, was used to hedge the variability in cash flows in monthly interest payments made on $100.0 million of one-month LIBOR-based borrowings on the credit facility (and subsequent refinancings thereof) due to changes in the one-month LIBOR rate.

 

In October 2009, the Partnership executed an interest rate swap with a major financial institution.  The swap, which became effective on May 16, 2011 and expires on May 16, 2016, is used to hedge the variability in interest payments due to changes in the one-month LIBOR swap curve with respect to $100.0 million of one-month LIBOR-based borrowings on the credit facility at a fixed rate of 3.93%.

 

In April 2011, the Partnership executed an interest rate cap with a major financial institution.  The rate cap, which became effective on April 13, 2011 and expires on April 13, 2016, is used to hedge the variability in interest payments due to changes in the one-month LIBOR rate above 5.