Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐
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 9161800 South StreetWaltham, Massachusetts 02454-9161(Address of principal executive offices, including zip code)
(781) 894-8800(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Units representing limited partner interests
GLP
New York Stock Exchange
9.75% Series A Fixed-to-Floating Cumulative Redeemable
GLP pr A
Perpetual Preferred Units representing limited partner interests
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The issuer had 33,995,563 common units outstanding as of August 3, 2020.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
3
Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019
4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019
5
Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019
6
Consolidated Statements of Partners’ Equity for the three and six months ended June 30, 2020 and 2019
7
Notes to Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
50
Item 3. Quantitative and Qualitative Disclosures About Market Risk
76
Item 4. Controls and Procedures
78
PART II. OTHER INFORMATION
79
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
80
SIGNATURES
81
Item 1.Financial Statements
GLOBAL PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
(Unaudited)
June 30,
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
10,358
12,042
Accounts receivable, net
232,832
413,195
Accounts receivable—affiliates
7,496
7,823
Inventories
344,026
450,482
Brokerage margin deposits
32,296
34,466
Derivative assets
48,571
4,564
Prepaid expenses and other current assets
93,397
81,940
Total current assets
768,976
1,004,512
Property and equipment, net
1,075,084
1,104,863
Right of use assets, net
282,025
296,746
Intangible assets, net
41,340
46,765
Goodwill
323,889
324,474
Other assets
30,964
31,067
Total assets
2,522,278
2,808,427
Liabilities and partners’ equity
Current liabilities:
Accounts payable
163,351
373,386
Working capital revolving credit facility—current portion
41,700
148,900
Lease liability—current portion
70,622
68,160
Environmental liabilities—current portion
5,009
Trustee taxes payable
43,739
42,932
Accrued expenses and other current liabilities
94,586
102,802
Derivative liabilities
8,089
12,698
Total current liabilities
427,096
753,887
Working capital revolving credit facility—less current portion
175,000
Revolving credit facility
188,000
192,700
Senior notes
691,355
690,533
Long-term lease liability—less current portion
223,547
239,349
Environmental liabilities—less current portion
51,290
54,262
Financing obligations
147,400
148,127
Deferred tax liabilities
54,999
42,879
Other long—term liabilities
55,085
52,451
Total liabilities
2,013,772
2,349,188
Partners’ equity
Global Partners LP equity:
Series A preferred limited partners (2,760,000 units issued and outstanding at June 30, 2020 and December 31, 2019, respectively)
67,226
Common limited partners (33,995,563 units issued and 33,840,822 outstanding at June 30, 2020 and 33,995,563 units issued and 33,867,393 outstanding at December 31, 2019)
443,326
398,535
General partner interest (0.67% interest with 230,303 equivalent units outstanding at June 30, 2020 and December 31, 2019)
(2,621)
(2,620)
Accumulated other comprehensive loss
(509)
(5,076)
Total Global Partners LP equity
507,422
458,065
Noncontrolling interest
1,084
1,174
Total partners’ equity
508,506
459,239
Total liabilities and partners’ equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
Three Months Ended
Six Months Ended
Sales
1,469,577
3,507,540
4,064,670
6,487,166
Cost of sales
1,229,630
3,340,397
3,678,985
6,163,179
Gross profit
239,947
167,143
385,685
323,987
Costs and operating expenses:
Selling, general and administrative expenses
59,017
40,968
99,940
82,058
Operating expenses
76,714
86,451
159,267
169,395
Lease exit and termination gain
—
(493)
Amortization expense
2,713
2,977
5,425
5,953
Net gain on sale and disposition of assets
(811)
(1,128)
(68)
(575)
Long-lived asset impairment
1,724
Total costs and operating expenses
139,357
129,268
266,288
256,338
Operating income
100,590
37,875
119,397
67,649
Interest expense
(21,089)
(23,066)
(42,690)
(46,022)
Income before income tax (expense) benefit
79,501
14,809
76,707
21,627
Income tax (expense) benefit
(3,528)
(438)
2,341
(462)
Net income
75,973
14,371
79,048
21,165
Net loss attributable to noncontrolling interest
289
118
490
450
Net income attributable to Global Partners LP
76,262
14,489
79,538
21,615
Less: General partner’s interest in net income, including incentive distribution rights
511
366
533
670
Less: Series A preferred limited partner interest in net income
1,682
3,364
Net income attributable to common limited partners
74,069
12,441
75,641
17,581
Basic net income per common limited partner unit
2.19
0.37
2.23
0.52
Diluted net income per common limited partner unit
2.17
0.36
2.21
0.51
Basic weighted average common limited partner units outstanding
33,869
33,755
33,754
Diluted weighted average common limited partner units outstanding
34,204
34,286
34,248
34,259
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income:
Change in fair value of cash flow hedges
5,187
Change in pension liability
2,360
736
(620)
2,480
Total other comprehensive income
7,547
4,567
Comprehensive income
83,520
15,107
83,615
23,645
Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Global Partners LP
83,809
15,225
84,105
24,095
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
50,655
54,310
Amortization of deferred financing fees
2,567
2,554
Amortization of senior notes discount
773
Bad debt expense
360
339
Unit-based compensation expense
587
1,590
Write-off of financing fees
667
188
Changes in operating assets and liabilities
Accounts receivable
180,003
(39,467)
Accounts receivable-affiliate
327
704
106,142
(40,009)
Broker margin deposits
2,170
(5,188)
Prepaid expenses, all other current assets and other assets
(12,546)
7,460
(210,035)
(25,852)
807
(2,407)
Change in derivatives
(48,616)
25,408
Accrued expenses, all other current liabilities and other long-term liabilities
8,211
(34,485)
Net cash provided by (used in) operating activities
162,003
(33,492)
Cash flows from investing activities
Capital expenditures
(21,746)
(29,974)
Seller note issuances
(1,188)
(640)
Proceeds from sale of property and equipment
6,082
10,053
Net cash used in investing activities
(16,852)
(20,561)
Cash flows from financing activities
Net (payments on) borrowings from working capital revolving credit facility
(107,200)
102,800
Net payments on revolving credit facility
(4,700)
(8,000)
Repurchase of common units
(291)
LTIP units withheld for tax obligations
(30)
(32)
Noncontrolling interest capital contribution
400
Distributions to limited partners and general partner
(35,014)
(38,390)
Net cash (used in) provided by financing activities
(146,835)
56,378
(Decrease) increase in cash and cash equivalents
(1,684)
2,325
Cash and cash equivalents at beginning of period
8,121
Cash and cash equivalents at end of period
10,446
Supplemental information
Cash paid during the period for interest
32,376
34,839
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
Partners' Equity
Series A
Accumulated
Preferred
Common
General
Other
Total
Limited
Partner
Comprehensive
Noncontrolling
Partners’
Three and six months ended June 30, 2020
Partners
Interest
Loss
Equity
Balance at December 31, 2019
Net income (loss)
1,572
22
(201)
3,075
(1,682)
(17,848)
(443)
(19,973)
Unit-based compensation
288
Other comprehensive income
(2,980)
(25)
Dividends on repurchased units
68
Balance at March 31, 2020
382,590
(3,041)
(8,056)
1,373
440,092
(289)
(13,385)
(91)
(15,158)
299
(5)
49
Balance at June 30, 2020
Three and six months ended June 30, 2019
Balance at December 31, 2018
437,874
(2,509)
(5,260)
1,863
499,194
5,140
304
(332)
6,794
(16,998)
(317)
(18,997)
795
1,744
LTIP units withheld for tax obligation
(8)
Balance at March 31, 2019
426,803
(2,522)
(3,516)
1,531
489,522
(118)
(17,338)
(373)
(19,393)
(24)
Balance at June 30, 2019
422,677
(2,529)
(2,780)
1,413
486,007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Global Partners LP (the “Partnership”) is a master limited partnership formed in March 2005. 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 is one of the region’s largest independent owners, suppliers and operators of gasoline stations and convenience stores. As of June 30, 2020, the Partnership had a portfolio of 1,532 owned, leased and/or supplied gasoline stations, including 277 directly operated convenience stores, primarily in the Northeast. The Partnership is also one of the largest distributors of gasoline, distillates, residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York. The Partnership engages in the purchasing, selling, gathering, blending, storing and logistics of transporting petroleum and related products, including gasoline and gasoline blendstocks (such as ethanol), distillates (such as home heating oil, diesel and kerosene), residual oil, renewable fuels, crude oil and propane and in the transportation of petroleum products and renewable fuels by rail from the mid-continent region of the United States and Canada.
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 most of its gasoline station and convenience store employees who are employed by Global Montello Group Corp. (“GMG”), a wholly owned subsidiary of the Partnership.
The General Partner, which holds a 0.67% general partner interest in the Partnership, is owned by affiliates of the Slifka family. As of June 30, 2020, affiliates of the General Partner, including its directors and executive officers and their affiliates, owned 6,143,205 common units, representing a 18.1% limited partner interest.
Recent Event
Amended Credit Agreement—On May 7, 2020, the Partnership and certain of its subsidiaries entered into the fourth amendment to third amended and restated credit agreement which, among other things, provides temporary adjustments to certain covenants and reduces the total aggregate commitment by $130.0 million. See Note 8 for additional information.
Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019 reflect the accounts of the Partnership. Upon consolidation, all intercompany balances and transactions have been eliminated.
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, 2019 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, except as described in Note 19, “New Accounting Standards,” as it relates to the adoption of Accounting Standard Update (“ASU”) ASU 2016-13, “Measurement of Credit Losses on Financial
Instruments,” including modifications to that standard thereafter, and now codified as Accounting Standards Codification 326 (“ASC 326”), which the Partnership adopted on January 1, 2020.
The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2020. The consolidated balance sheet at December 31, 2019 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, 2019.
Noncontrolling Interest
The Partnership acquired a 60% interest in Basin Transload, LLC (“Basin Transload”) on February 1, 2013. After evaluating Accounting Standards Codification (“ASC”) Topic 810, “Consolidations,” the Partnership concluded it is appropriate to consolidate the balance sheet and statements 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 sheets and statements of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The outbreak of COVID-19 across the United States and the responses of governmental bodies (federal, state and municipal), companies and individuals, including mandated and/or voluntary restrictions to mitigate the spread of the virus, have caused a significant economic downturn. The uncertainty surrounding the short and long-term impact of COVID-19, including the inability to project the timing of an economic recovery, may have an impact on the Partnership’s use of estimates. Among the estimates made by management are (i) estimated fair value of assets and liabilities acquired in a business combination and identification of associated goodwill and intangible assets, (ii) fair value of derivative instruments, (iii) accruals and contingent liabilities, (iv) allowance for credit losses, (v) assumptions used to evaluate goodwill, property and equipment and intangibles for impairment, (vi) environmental and asset retirement obligation provisions, (vii) cost of sales accrual, and (viii) weighted average discount rate used in lease accounting. Although the Partnership believes its estimates are reasonable, actual results could differ from these estimates.
Concentration of Risk
Due to the nature of the Partnership’s businesses and its reliance, in part, on consumer travel and spending patterns, the Partnership may experience more demand for gasoline 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. Therefore, the Partnership’s volumes in gasoline are typically higher in the second and third quarters of the calendar year. However, the COVID-19 pandemic has had a negative impact on gasoline demand and the extent and duration of that impact is uncertain. 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 volumes are generally higher during the first and fourth quarters of the calendar year. These factors may result in fluctuations in the Partnership’s quarterly operating results.
9
The following table presents the Partnership’s product sales and other revenues as a percentage of the consolidated sales for the periods presented:
Gasoline sales: gasoline and gasoline blendstocks (such as ethanol)
69
%
67
74
Distillates (home heating oil, diesel and kerosene), residual oil and propane sales
23
15
27
Crude oil sales and crude oil logistics revenue
1
Convenience store sales, rental income and sundries
100
The following table presents the Partnership’s product margin by segment as a percentage of the consolidated product margin for the periods presented:
Wholesale segment
43
20
Gasoline Distribution and Station Operations segment
56
77
71
Commercial segment
2
See Note 15, “Segment Reporting,” for additional information on the Partnership’s operating segments.
None of the Partnership’s customers accounted for greater than 10% of total sales for the three and six months ended June 30, 2020 and 2019.
Note 2. Revenue from Contract Customers
Disaggregation of Revenue
The following table provides the disaggregation of revenue from contracts with customers and other sales by segment for the periods presented (in thousands):
Three Months Ended June 30, 2020
Revenue from contracts with customers:
Wholesale
GDSO
Commercial
Refined petroleum products, renewable fuels, crude oil and propane
208,121
455,161
78,011
741,293
Station operations
86,967
Total revenue from contracts with customers
542,128
828,260
Other sales:
Revenue originating as physical forward contracts and exchanges
568,700
54,951
623,651
Revenue from leases
538
17,128
17,666
Total other sales
569,238
641,317
Total sales
777,359
559,256
132,962
10
Three Months Ended June 30, 2019
339,562
1,025,669
211,817
1,577,048
102,889
1,128,558
1,679,937
1,664,440
145,000
1,809,440
526
17,637
18,163
1,664,966
1,827,603
2,004,528
1,146,195
356,817
Six Months Ended June 30, 2020
638,461
1,200,776
225,626
2,064,863
167,869
1,368,645
2,232,732
1,625,297
170,710
1,796,007
1,079
34,852
35,931
1,626,376
1,831,938
2,264,837
1,403,497
396,336
Six Months Ended June 30, 2019
883,479
1,855,841
390,159
3,129,479
189,516
2,045,357
3,318,995
2,829,212
302,247
3,131,459
1,043
35,669
36,712
2,830,255
3,168,171
3,713,734
2,081,026
692,406
Nature of Goods and Services
Revenue from Contracts with Customers (ASC 606):
11
Other Revenue:
Transaction Price Allocated to Remaining Performance Obligations
The Partnership has elected certain of the optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Partnership applies the practical expedient in paragraph ASC 606-10-50-14 to its contracts with customers where revenue is tied to a market-index and does not disclose information about variable consideration from remaining performance obligations for which the Partnership recognizes revenue.
The fixed component of estimated revenues expected to be recognized in the future related to performance obligations tied to a market index that are unsatisfied (or partially unsatisfied) at the end of the reporting period are not significant.
Contract Balances
A receivable, which is included in accounts receivable, net in the accompanying consolidated balance sheets, is recognized in the period the Partnership provides services when its right to consideration is unconditional. In contrast, a contract asset will be recognized when the Partnership has fulfilled a contract obligation but must perform other obligations before being entitled to payment.
The nature of the receivables related to revenue from contracts with customers and other revenue, as well as contract assets, are the same, given they are related to the same customers and have the same risk profile and securitization. Payment terms on invoiced amounts are typically 2 to 30 days.
A contract liability is recognized when the Partnership has an obligation to transfer goods or services to a customer for which the Partnership has received consideration (or the amount is due) from the customer. The Partnership had no significant contract liabilities at both June 30, 2020 and December 31, 2019.
Note 3. Net Income Per Common 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 or losses is assumed to be allocated to the common unitholders and to the General Partner’s general partner interest.
12
Common units outstanding as reported in the accompanying consolidated financial statements at June 30, 2020 and December 31, 2019 excludes 154,741 and 128,170 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 common limited partner unit (basic and diluted). For all periods presented below, the Series A Preferred Units (as defined in Note 14) are not potentially dilutive securities based on the nature of the conversion feature.
The following table provides a reconciliation of net income and the assumed allocation of net income (loss) to the common limited partners (after deducting amounts allocated to Series A preferred unitholders) for purposes of computing net income per common limited partner unit for the periods presented (in thousands, except per unit data):
Numerator:
IDRs
75,751
14,123
Declared distribution
15,701
15,595
106
17,895
17,508
269
Assumed allocation of undistributed net (income) loss
60,561
60,156
405
(3,406)
(3,385)
(21)
Assumed allocation of net income
97
Less net income attributable to Series A preferred limited partners
Denominator:
Basic weighted average common units outstanding
Dilutive effect of phantom units
335
531
Diluted weighted average common units outstanding
13
79,005
20,945
29,177
28,980
197
35,606
34,846
235
525
Assumed allocation of undistributed net income (loss)
50,361
50,025
336
(13,991)
(13,901)
(90)
145
379
505
The board of directors of the General Partner declared the following quarterly cash distributions on its common units:
Per Unit Cash
Distribution Declared for the
Cash Distribution Declaration Date
Distribution Declared
Quarterly Period Ended
April 27, 2020
0.39375
March 31, 2020
July 31, 2020
0.45875
June 30, 2020
The board of directors of the General Partner declared the following quarterly cash distributions on its Series A Preferred Units:
Quarterly Period Covering
April 16, 2020
0.609375
February 15, 2020 - May 14, 2020
July 20, 2020
May 15, 2020 - August 14, 2020
See Note 14, “Partners’ Equity and Cash Distributions” for further information.
Note 4. Inventories
The Partnership hedges substantially all of its petroleum and ethanol inventory using a variety of instruments, primarily exchange-traded futures contracts. These futures contracts are entered into when inventory is purchased and are either designated as fair value hedges against the inventory on a specific barrel basis for inventories qualifying for fair value hedge accounting or not designated and maintained as economic hedges against certain inventory of the Partnership on a specific barrel basis. Changes in fair value of these futures contracts, as well as the offsetting change in fair value on the hedged inventory, are recognized in earnings as an increase or decrease in cost of sales. All hedged inventory designated in a fair value hedge relationship is valued using the lower of cost, as determined by specific
14
identification, or net realizable value, as determined at the product level. All petroleum and ethanol inventory not designated in a fair value hedging relationship is carried at the lower of historical cost, on a first-in, first-out basis, or net realizable value. Renewable Identification Numbers (“RINs”) inventory is carried at the lower of historical cost, on a first-in, first-out basis, or net realizable value. Convenience store inventory is carried at the lower of historical cost, based on a weighted average cost method, or net realizable value.
Inventories consisted of the following (in thousands):
Distillates: home heating oil, diesel and kerosene
173,970
222,202
Gasoline
72,417
120,958
Gasoline blendstocks
30,490
39,702
Crude oil
22,315
16,018
Residual oil
21,786
26,521
Propane and other
45
1,356
Renewable identification numbers (RINs)
687
1,329
Convenience store inventory
22,316
22,396
The decrease in inventories, with the exception of convenience store inventory and RINs, is due to lower prices at June 30, 2020 compared to December 31, 2019.
In addition to its own inventory, the Partnership has exchange agreements for petroleum products and ethanol 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 $5.7 million and $9.2 million at June 30, 2020 and December 31, 2019, respectively. Negative exchange balances are accounted for as accounts payable and amounted to $5.4 million and $17.6 million at June 30, 2020 and December 31, 2019, respectively. Exchange transactions are valued using current carrying costs.
Note 5. Goodwill
The following table presents changes in goodwill, all of which has been allocated to the GDSO segment (in thousands):
Dispositions (1)
(585)
Note 6. Property and Equipment
Property and equipment consisted of the following (in thousands):
Buildings and improvements
1,208,887
1,196,502
Land
450,474
452,104
Fixtures and equipment
34,208
46,848
Idle plant assets
30,500
Construction in process
29,230
27,951
Capitalized internal use software
30,275
33,502
Total property and equipment
1,783,574
1,787,407
Less accumulated depreciation
708,490
682,544
Property and equipment includes assets held for sale of $0.2 million and $4.6 million at June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020, the Partnership had a $42.9 million remaining net book value of long-lived assets at its West Coast facility, including $30.5 million related to the Partnership’s ethanol plant acquired in 2013. The Partnership would need to take certain measures to prepare the facility for ethanol production in order to place the plant into service and commence depreciation. Therefore, the $30.5 million related to the ethanol plant was included in property and equipment and classified as idle plant assets at June 30, 2020 and December 31, 2019.
If the Partnership is unable to generate cash flows to support the recoverability of the plant and facility assets, this may become an indicator of potential impairment of the West Coast facility. The Partnership believes these assets are recoverable but continues to monitor the market for ethanol, the continued business development of this facility for ethanol or other product transloading, and the related impact this may have on the facility’s operating cash flows and whether this would constitute an impairment indicator.
Evaluation of Long-Lived Asset Impairment
The Partnership recognized an impairment charge relating to certain right of use assets allocated to the Wholesale segment in the amount of $1.7 million for each of the three and six months ended June 30, 2020, which is included in long-lived asset impairment in the accompanying statements of operations.
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Note 7. Sales and Disposition of Assets
The following table provides the Partnership’s (gain) loss on sale and dispositions of assets for the periods presented (in thousands):
Periodic divestiture of gasoline stations
(650)
(278)
(142)
Strategic asset divestiture program - Real estate firm coordinated sale
(168)
(1,433)
(100)
(1,730)
Loss on assets held for sale
480
406
1,265
(175)
(96)
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Periodic Divestiture of Gasoline Stations
As part of the routine course of operations in the GDSO segment, the Partnership may periodically divest certain gasoline stations. The gain or loss on the sale, representing cash proceeds less net book value of assets and recognized liabilities at disposition, net of settlement and dispositions costs, is recorded in net gain on sale and disposition of assets in the accompanying consolidated statements of operations and amounted to a gain of ($0.6 million) and $0 for the three months ended June 30, 2020 and 2019, respectively, and ($0.3 million) and ($0.1 million) for the six months ended June 30, 2020, and 2019, respectively.
Strategic Asset Divestiture Program
The Partnership identified certain non-strategic GDSO sites that are part of its Strategic Asset Divestiture Program (the “Divestiture Program”). The gain or loss on the sales of these sites, representing cash proceeds less net book value of assets and recognized liabilities at disposition, net of settlement and dispositions costs, is recorded in net gain on sale and disposition of assets in the accompanying consolidated statements of operations.
Real Estate Firm Coordinated Sales—The Partnership has retained a real estate firm to coordinate the continuing sale of non-strategic GDSO sites. The Partnership sold two sites and three sites during the three and six months ended June 30, 2020, respectively. The Partnership recognized a gain of ($0.2 million) and ($0.1 million) on the sales of these sites for the three and six months ended June 30, 2020, respectively, including the derecognition of $0.5 million and $0.6 million of GDSO goodwill for these respective periods.
The Partnership recognized a gain of ($1.4 million) and ($1.7 million) on the sales of sites for the three and six months ended June 30, 2019, respectively, including the derecognition of $1.3 million and $2.2 million of GDSO goodwill for these respective periods.
Loss on Assets Held for Sale
In conjunction with the periodic divestiture of gasoline stations and the sale of sites within the Divestiture Program, the Partnership may classify certain gasoline station assets as held for sale. Impairment charges related to assets held for sale are included in net gain on sale and disposition of assets in the accompanying consolidated statements of operations.
The Partnership classified 1 site as held for sale at June 30, 2020 associated with the periodic divestiture of gasoline station sites and the real estate firm coordinated sales discussed above. Impairment charges related to these assets held for sale were $0 and $0.4 million for the three and six months ended June 30, 2020, respectively.
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The Partnership recorded impairment charges related to assets held for sale associated with the periodic divestiture of gasoline station sites and the real estate firm coordinated sales in the amount of $0.5 million and $1.3 million for the three and six months ended June 30, 2019, respectively.
Assets held for sale of $0.2 million and $4.6 million at June 30, 2020 and December 31, 2019, respectively, are included in property and equipment in the accompanying consolidated balance sheets. Assets held for sale are expected to be sold within the next 12 months.
The Partnership recognizes gains and losses on the sale and disposition of other assets, including vehicles, fixtures and equipment, and the gain or loss on such other assets are included in other in the aforementioned table.
Note 8. Debt and Financing Obligations
Credit Agreement
Certain subsidiaries of the Partnership, as borrowers, and the Partnership and certain of its subsidiaries, as guarantors, have a $1.17 billion senior secured credit facility (the “Credit Agreement”) which was amended on May 7, 2020 to, among other things, provide temporary adjustments to certain covenants and reduce the total aggregate commitment by $130.0 million from $1.3 billion (see “–Fourth Amendment to the Credit Agreement” below). The Credit Agreement matures on April 29, 2022.
There are two facilities under the Credit Agreement:
Availability under the working capital revolving credit facility is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets. Availability under the borrowing base may be affected by events beyond the Partnership’s control, such as changes in petroleum product prices, collection cycles, counterparty performance, advance rates and limits and general economic conditions.
The average interest rates for the Credit Agreement were 2.8% and 4.5% for the three months ended June 30, 2020 and 2019, respectively, and 3.1% and 4.6% for the six months ended June 30, 2020 and 2019, respectively.
The Partnership classifies a portion of its working capital revolving credit facility as a current liability and a portion as a long-term liability. The portion classified as a long-term liability represents the amounts expected to be outstanding during the entire year based on an analysis of historical daily borrowings under the working capital revolving credit facility, the seasonality of borrowings, forecasted future working capital requirements and forward product curves, and because the Partnership has a multi-year, long-term commitment from its bank group. Accordingly, at June 30, 2020 the Partnership estimated working capital revolving credit facility borrowings will equal or exceed $175.0 million over the next twelve months and, therefore, classified $41.7 million as the current portion at June 30, 2020, representing the amount the Partnership expects to pay down over the next twelve months. The long-term portion of the working capital revolving credit facility was $175.0 million at both June 30, 2020 and December 31, 2019, and the current portion was $41.7 million and $148.9 million at June 30, 2020 and December 31, 2019, respectively. The decrease in total borrowings under the working capital revolving credit facility of $107.2 million from December 31, 2019 was in part due to lower prices.
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As of June 30, 2020, the Partnership had total borrowings outstanding under the Credit Agreement of $404.7 million, including $188.0 million outstanding on the revolving credit facility. In addition, the Partnership had outstanding letters of credit of $39.9 million. Subject to borrowing base limitations, the total remaining availability for borrowings and letters of credit was $725.4 million and $660.2 million at June 30, 2020 and December 31, 2019, respectively.
The Credit Agreement imposes financial covenants that require the Partnership to maintain certain minimum working capital amounts, a minimum combined interest coverage ratio, a maximum senior secured leverage ratio and a maximum total leverage ratio. The Partnership was in compliance with the foregoing covenants at June 30, 2020. The Credit Agreement also contains a representation whereby there can be no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect (as defined in the Credit Agreement). In addition, the Credit Agreement limits distributions by the Partnership to its unitholders to the amount of Available Cash (as defined in the Partnership’s partnership agreement).
Please read Note 8 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information on the Credit Agreement.
Deferred Financing Fees
The Partnership incurs bank fees related to its Credit Agreement and other financing arrangements. These deferred financing fees are capitalized and amortized over the life of the Credit Agreement or other financing arrangements. In connection with the Fourth Amendment (as defined below) in May 2020, the Partnership capitalized additional financing fees of $1.2 million. Also in connection with the Fourth Amendment, the Partnership incurred expenses of approximately $0.7 million associated with the write-off of a portion of the related deferred financing fees. These expenses are included in interest expense in the accompanying consolidated statements of operations for the three and six months ended June 30, 2020. The Partnership had unamortized deferred financing fees of $15.9 million and $18.0 million at June 30, 2020 and December 31, 2019, respectively.
Unamortized fees related to the Credit Agreement are included in other current assets and other long-term assets and amounted to $6.6 million and $7.8 million at June 30, 2020 and December 31, 2019, respectively. Unamortized fees related to the senior notes are presented as a direct deduction from the carrying amount of that debt liability and amounted to $8.6 million and $9.5 million at June 30, 2020 and December 31, 2019, respectively. Unamortized fees related to the Sale-Leaseback Transaction (defined below) are presented as a direct deduction from the carrying amount of the financing obligation and amounted to $0.7 million at both June 30, 2020 and December 31, 2019.
Amortization expense of approximately $1.3 million and $1.2 million for the three months ended June 30, 2020 and 2019, respectively, and $2.6 million and $2.5 million for the six months ended June 30, 2020 and 2019, respectively, is included in interest expense in the accompanying consolidated statements of operations.
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Supplemental cash flow information
The following table presents supplemental cash flow information related to the Credit Agreement for the periods presented (in thousands):
Borrowings from working capital revolving credit facility
680,100
881,700
Payments on working capital revolving credit facility
(787,300)
(778,900)
Borrowings from revolving credit facility
50,000
Payments on revolving credit facility
(54,700)
Fourth Amendment to the Credit Agreement
On May 7, 2020, the Partnership and certain of its subsidiaries entered into the Fourth Amendment to Third Amended and Restated Credit Agreement (the “Fourth Amendment”), which further amends the Credit Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Credit Agreement.
The Fourth Amendment amends certain terms, provisions and covenants of the Credit Agreement, including, without limitation:
All other material terms of the Credit Agreement remain substantially the same as disclosed in Note 8 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.
Senior Notes
The Partnership had 7.00% senior notes due 2027 and 7.00% senior notes due 2023 outstanding at June 30, 2020. Please read Note 8 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information on these senior notes.
Financing Obligations
Capitol Acquisition
On June 1, 2015, the Partnership acquired retail gasoline stations and dealer supply contracts from Capitol Petroleum Group (“Capitol”). In connection with the acquisition, the Partnership assumed a financing obligation of $89.6 million associated with two sale-leaseback transactions by Capitol for 53 leased sites that did not meet the criteria for sale accounting. During the terms of these leases, which expire in May 2028 and September 2029, in lieu of recognizing lease expense for the lease rental payments, the Partnership incurs interest expense associated with the financing obligation. Interest expense of approximately $2.3 million was recorded for each of the three months ended June 30, 2020 and 2019, and $4.6 million and $4.7 million was recorded for the six months ended June 30, 2020 and 2019, respectively, which is included in interest expense in the accompanying consolidated statements of operations. The financing obligation will amortize through expiration of the leases based upon the lease rental payments which were $2.5 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively, and $5.0 million and $4.9 million for the six months ended June 30, 2020 and 2019, respectively. The financing obligation balance outstanding at June 30, 2020 was $86.6 million associated with the Capitol acquisition.
Sale-Leaseback Transaction
On June 29, 2016, the Partnership sold to a premier institutional real estate investor (the “Buyer”) real property assets, including the buildings, improvements and appurtenances thereto, at 30 gasoline stations and convenience stores located in Connecticut, Maine, Massachusetts, New Hampshire and Rhode Island (the “Sale-Leaseback Sites”) for a purchase price of approximately $63.5 million. In connection with the sale, the Partnership entered into a Master Unitary Lease Agreement with the Buyer to lease back the real property assets sold with respect to the Sale-Leaseback Sites (such Master Lease Agreement, together with the Sale-Leaseback Sites, the “Sale-Leaseback Transaction”).
As a result of not meeting the criteria for sale accounting for these sites, the Sale-Leaseback Transaction is accounted for as a financing arrangement. As such, the property and equipment sold and leased back by the Partnership has not been derecognized and continues to be depreciated. The Partnership recognized a corresponding financing obligation of $62.5 million equal to the $63.5 million cash proceeds received for the sale of these sites, net of $1.0 million financing fees. During the term of the lease, which expires in June 2031, in lieu of recognizing lease expense for the lease rental payments, the Partnership incurs interest expense associated with the financing obligation. Lease rental payments are recognized as both interest expense and a reduction of the principal balance associated with the financing obligation. Interest expense was $1.1 million for each of the three months ended June 30, 2020 and 2019 and $2.2 million for each of the six months ended June 30, 2020 and 2019. Lease rental payments were $1.1 million for each of the three months ended June 30, 2020 and 2019, and $2.3 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively. The financing obligation balance outstanding at June 30, 2020 was $62.2 million associated with the Sale-Leaseback Transaction.
Note 9. Derivative Financial Instruments
The Partnership principally uses derivative instruments, which include regulated exchange-traded futures and options contracts (collectively, “exchange-traded derivatives”) and physical and financial forwards and over-the-counter (“OTC”) swaps (collectively, “OTC derivatives”), to reduce its exposure to unfavorable changes in commodity market prices. The Partnership uses these exchange-traded and OTC derivatives to hedge commodity price risk associated with its inventory, fuel purchases and undelivered forward commodity purchases and sales (“physical forward contracts”). The Partnership accounts for derivative transactions in accordance with ASC Topic 815, “Derivatives and Hedging,” and recognizes derivatives instruments as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. The changes in fair value of the derivative transactions are presented currently in earnings, unless specific hedge accounting criteria are met.
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The fair value of exchange-traded derivative transactions reflects amounts that would be received from or paid to the Partnership’s brokers upon liquidation of these contracts. The fair value of these exchange-traded derivative transactions is presented on a net basis, offset by the cash balances on deposit with the Partnership’s brokers, presented as brokerage margin deposits in the consolidated balance sheets. The fair value of OTC derivative transactions reflects amounts that would be received from or paid to a third party upon liquidation of these contracts under current market conditions. The fair value of these OTC derivative transactions is presented on a gross basis as derivative assets or derivative liabilities in the consolidated balance sheets, unless a legal right of offset exists. The presentation of the change in fair value of the Partnership’s exchange-traded derivatives and OTC derivative transactions depends on the intended use of the derivative and the resulting designation.
The following table summarizes the notional values related to the Partnership’s derivative instruments outstanding at June 30, 2020:
Units (1)
Unit of Measure
Exchange-Traded Derivatives
Long
84,325
Thousands of barrels
Short
(87,917)
OTC Derivatives (Petroleum/Ethanol)
11,185
(7,599)
Derivatives Accounted for as Hedges
The Partnership utilizes fair value hedges and cash flow hedges to hedge commodity price risk.
Fair Value Hedges
Derivatives designated as fair value hedges are used to hedge price risk in commodity inventories and principally include exchange-traded futures contracts that are entered into in the ordinary course of business. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting change in fair value on the hedged item of the risk being hedged. Gains and losses related to fair value hedges are recognized in the consolidated statements of operations through cost of sales. These futures contracts are settled on a daily basis by the Partnership through brokerage margin accounts.
The Partnership’s fair value hedges include exchange-traded futures contracts and OTC derivative contracts that are hedges against inventory with specific futures contracts matched to specific barrels. The change in fair value of these futures contracts and the change in fair value of the underlying inventory generally provide an offset to each other in the consolidated statements of operations.
The following table presents the gains and losses from the Partnership’s derivative instruments involved in fair value hedging relationships recognized in the consolidated statements of operations for the periods presented (in thousands):
Statement of Gain (Loss)
Recognized in Income on
Derivatives
Derivatives in fair value hedging relationship
Exchange-traded futures contracts and OTC derivative contracts for petroleum commodity products
(46,637)
5,899
1,698
1,238
Hedged items in fair value hedge relationship
Physical inventory
44,025
(8,036)
(6,157)
(2,985)
Cash Flow Hedges
The Partnership’s sales and cost of sales fluctuate with changes in commodity prices. In addition to the Partnership’s commodity price risk associated with its inventory and undelivered forward commodity purchases and sales, the Partnership’s gross profit may fluctuate in periods where commodity prices are rising or declining depending on the magnitude and duration of the commodity price change. In the Partnership’s GDSO segment, the Partnership has observed trends where margins may improve in periods where wholesale gasoline prices are declining and margins may compress during periods where wholesale gasoline prices are rising. Additionally, the Partnership has certain operating costs that are indirectly impacted by fluctuations in commodity prices such that its operating costs may increase during periods where margins compress and, conversely, operating costs may decrease during periods where margins improve. To hedge the Partnership’s cash flow risk as a result of this observed trend in the GDSO segment, the Partnership has entered into exchange-traded commodity swap contracts and has designated them as a cash flow hedge of its fuel purchases designed to reduce its cost of fuel if market prices rise through 2021 or increase its cost of fuel if market prices decrease through 2021. For a derivative instrument being designated as a cash flow hedge, the effective portion of the derivative gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into the consolidated statement of income through cost of goods sold in the same period that the hedged exposure affects earnings.
The amount of gain (loss) recognized in other comprehensive income for derivatives designated in cash flow hedging relationships was $5.4 million for each of the three and six months ended June 30, 2020. The amount of gain (loss) reclassified from other comprehensive income into cost of sales for derivatives designated in cash flow hedging relationships was $0.2 million for each of the three and six months ended June 30, 2020. The amount of gain (loss) recognized in other comprehensive income as of June 30, 2020 and expected to be reclassified into earnings within the next 12 months is $3.4 million.
Derivatives Not Accounted for as Hedges
The Partnership utilizes petroleum and ethanol commodity contracts to hedge price and currency risk in certain commodity inventories and physical forward contracts.
Petroleum and Ethanol Commodity Contracts
The Partnership uses exchange-traded derivative contracts to hedge price risk in certain commodity inventories which do not qualify for fair value hedge accounting or are not designated by the Partnership as fair value hedges. Additionally, the Partnership uses exchange-traded derivative contracts, and occasionally financial forward and OTC swap agreements, to hedge commodity price exposure associated with its physical forward contracts which are not designated by the Partnership as cash flow hedges. These physical forward contracts, to the extent they meet the
definition of a derivative, are considered OTC physical forwards and are reflected as derivative assets or derivative liabilities in the consolidated balance sheet. The related exchange-traded derivative contracts (and financial forward and OTC swaps, if applicable) are also reflected as brokerage margin deposits (and derivative assets or derivative liabilities, if applicable) in the consolidated balance sheet, thereby creating an economic hedge. Changes in fair value of these derivative instruments are recognized in the consolidated statements of operations through cost of sales. These exchange-traded derivatives are settled on a daily basis by the Partnership through brokerage margin accounts.
While the Partnership seeks to maintain a position that is substantially balanced within its commodity product purchase and sale activities, it may experience net unbalanced positions for short periods of time as a result of variances in daily purchases and sales and transportation and delivery schedules as well as other logistical issues inherent in the businesses, such as weather conditions. In connection with managing these positions, the Partnership is aided by maintaining a constant presence in the marketplace. The Partnership also engages in a controlled trading program for up to an aggregate of 250,000 barrels of commodity products at any one point in time. Changes in fair value of these derivative instruments are recognized in the consolidated statements of operations through cost of sales.
The following table presents the gains and losses from the Partnership’s derivative instruments not involved in a hedging relationship recognized in the consolidated statements of operations for the periods presented (in thousands):
Derivatives not designated as
Recognized in
hedging instruments
Income on Derivatives
Commodity contracts
4,516
5,922
4,066
15,125
Margin Deposits
All of the Partnership’s exchange-traded derivative contracts (designated and not designated) are transacted through clearing brokers. The Partnership deposits initial margin with the clearing brokers, along with variation margin, which is paid or received on a daily basis, based upon the changes in fair value of open futures contracts and settlement of closed futures contracts. Cash balances on deposit with clearing brokers and open equity are presented on a net basis within brokerage margin deposits in the consolidated balance sheets.
Commodity Contracts and Other Derivative Activity
The Partnership’s commodity contracts and other derivative activity include: (i) exchange-traded derivative contracts that are hedges against inventory and either do not qualify for hedge accounting or are not designated in a hedge accounting relationship, (ii) exchange-traded derivative contracts used to economically hedge physical forward contracts, (iii) financial forward and OTC swap agreements used to economically hedge physical forward contracts and (iv) the derivative instruments under the Partnership’s controlled trading program. The Partnership does not take the normal purchase and sale exemption available under ASC 815 for any of its physical forward contracts.
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The following table presents the fair value of each classification of the Partnership’s derivative instruments and its location in the consolidated balance sheets at June 30, 2020 and December 31, 2019 (in thousands):
Derivatives Not
Designated as
Hedging
Balance Sheet Location
Instruments
Asset Derivatives:
Exchange-traded derivative contracts
5,432
73,174
78,606
Forward derivative contracts (1)
Total asset derivatives
121,745
127,177
Liability Derivatives:
(13,330)
(71,571)
(84,901)
(8,089)
Total liability derivatives
(79,660)
(92,990)
December 31, 2019
31,645
36,209
(3,838)
(26,354)
(30,192)
(12,698)
(39,052)
(42,890)
Credit Risk
The Partnership’s derivative financial instruments do not contain credit risk related to other contingent features that could cause accelerated payments when these financial instruments are in net liability positions.
The Partnership is exposed to credit loss in the event of nonperformance by counterparties to the Partnership’s exchange-traded and OTC derivative contracts, but the Partnership has no current reason to expect any material nonperformance by any of these counterparties. Exchange-traded derivative contracts, the primary derivative instrument utilized by the Partnership, are traded on regulated exchanges, greatly reducing potential credit risks. The Partnership utilizes major financial institutions as its clearing brokers for all New York Mercantile Exchange (“NYMEX”), Chicago Mercantile Exchange (“CME”) and Intercontinental Exchange (“ICE”) derivative transactions and the right of offset exists with these financial institutions under master netting agreements. Accordingly, the fair value of the Partnership’s exchange-traded derivative instruments is presented on a net basis in the consolidated balance sheets. Exposure on OTC derivatives is limited to the amount of the recorded fair value as of the balance sheet dates.
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Note 10. Fair Value Measurements
The following tables present, by level within the fair value hierarchy, the Partnership’s financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):
Fair Value at June 30, 2020
Cash Collateral
Level 1
Level 2
Level 3
Netting
Assets:
47,852
719
Exchange-traded/cleared derivative instruments (2)
(6,295)
38,591
Pension plans
16,668
10,373
97,535
Liabilities:
(7,746)
(343)
Fair Value at December 31, 2019
4,002
562
1,453
33,013
17,099
18,552
56,129
(12,112)
(586)
This table excludes cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. The carrying amounts of certain of the Partnership’s financial instruments, including cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. The carrying value of the credit facility approximates fair value due to the variable rate nature of these financial instruments.
The carrying value of the inventory qualifying for fair value hedge accounting approximates fair value due to adjustments for changes in fair value of the hedged item. The fair values of the derivatives used by the Partnership are disclosed in Note 9.
The determination of the fair values above incorporates factors including not only the credit standing of the counterparties involved, but also the impact of the Partnership’s nonperformance risks on its liabilities.
The Partnership estimates the fair values of its senior notes using a combination of quoted market prices for similar financing arrangements and expected future payments discounted at risk-adjusted rates, which are considered
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Level 2 inputs. The fair values of the senior notes, estimated by observing market trading prices of the respective senior notes, were as follows (in thousands):
Face
Fair
Value
7.00% senior notes due 2023
300,000
285,000
309,000
7.00% senior notes due 2027
400,000
371,000
423,000
Level 3 Information
The values of the Level 3 derivative contracts were calculated using market approaches based on a combination of observable and unobservable market inputs, including published and quoted NYMEX, CME, ICE, New York Harbor and third-party pricing information for a component of the underlying instruments as well as internally developed assumptions where there is little, if any, published or quoted prices or market activity.
The unobservable inputs used in the measurement of the Level 3 derivative contracts include estimates for location basis, transportation and throughput costs net of an estimated margin for current market participants. The estimated range and weighted average for these inputs include the following:
Low
High
Weighted
Product
($ per barrel)
Average
(3.75)
(2.00)
(3.26)
(4.95)
(3.25)
(4.88)
Propane
0.84
15.54
11.04
The respective weighted averages were calculated by weighting the contractual volumes of the location basis, transportation and throughput costs net of an estimated margin for current market participants. The Partnership ceased marketing propane during the quarter ended June 30, 2020 and, therefore, inputs were not required at June 30, 2020. Gains and losses recognized in earnings (or changes in net assets) are disclosed in Note 9.
Uncertainty in changes in the significant unobservable inputs to the fair value measurement if those inputs reasonably could have been different at the reporting date is as follows:
Significant
Impact on Fair Value
Unobservable Input
Position
Change to Input
Measurement
Location basis
Increase (decrease)
Gain (loss)
Loss (gain)
Transportation
Throughput costs
The following table presents a reconciliation of changes in fair value of the Partnership’s derivative contracts classified as Level 3 in the fair value hierarchy at June 30, 2020 (in thousands):
Fair value at December 31, 2019
Derivatives entered into during the period
(121)
Derivatives sold during the period
497
Realized gains (losses) recorded in cost of sales
Fair value at June 30, 2020
376
The Partnership’s policy is to recognize transfers between levels with the fair value hierarchy as of the beginning of the reporting period. The Partnership also excludes any activity for derivative instruments that were not classified as Level 3 at either the beginning or end of the reporting period.
Non-Recurring Fair Value Measures
Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as acquired assets and liabilities, losses related to firm non-cancellable purchase commitments or long-lived assets subject to impairment. For assets and liabilities measured on a non-recurring basis during the period, accounting guidance requires quantitative disclosures about the fair value measurements separately for each major category. See Note 7 for a discussion of the Partnership’s assets held for sale.
Note 11. Environmental Liabilities and Renewable Identification Numbers
Environmental Liabilities
The following table presents a summary roll forward of the Partnership’s environmental liabilities at June 30, 2020 (in thousands):
Balance at
Payments
Dispositions
Adjustments
Environmental Liability Related to:
Retail gasoline stations
55,493
(1,538)
(918)
(437)
52,600
Terminals
3,778
(79)
3,699
Total environmental liabilities
59,271
(1,617)
56,299
Current portion
Long-term portion
The Partnership’s estimates used in these environmental liabilities are based on all known facts at the time and its assessment of the ultimate remedial action outcomes. Among the many uncertainties that impact the Partnership’s estimates are the necessary regulatory approvals for, and potential modification of, its remediation plans, the amount of data available upon initial assessment of the impact of soil or water contamination, changes in costs associated with environmental remediation services and equipment, relief of obligations through divestitures of sites and the possibility of existing legal claims giving rise to additional claims. Dispositions generally represent relief of legal obligations through the sale of the related property with no retained obligation. Other adjustments generally represent changes in estimates for existing obligations or obligations associated with new sites. Therefore, although the Partnership believes that these environmental liabilities are adequate, no assurances can be made that any costs incurred in excess of these environmental liabilities or outside of indemnifications or not otherwise covered by insurance would not have a material adverse effect on the Partnership’s financial condition, results of operations or cash flows.
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Renewable Identification Numbers (RINs)
A RIN is a serial number assigned to a batch of renewable fuel for the purpose of tracking its production, use and trading as required by the U.S. Environmental Protection Agency’s (“EPA”) Renewable Fuel Standard that originated with the Energy Policy Act of 2005 and modified by the Energy Independence and Security Act of 2007. To evidence that the required volume of renewable fuel is blended with gasoline and diesel motor vehicle fuels, obligated parties must retire sufficient RINs to cover their Renewable Volume Obligation (“RVO”). The Partnership’s EPA obligations relative to renewable fuel reporting are comprised of foreign gasoline and diesel that the Partnership may import and blending operations at certain facilities. 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 the RVO is a calendar year and the settlement of the RVO typically occurs by March 31 of the following year, the settlement of the RVO can occur, under certain EPA deferral actions, more than one year after the close of the compliance period.
The Partnership’s Wholesale segment’s operating results may be sensitive to the timing associated with its RIN position relative to its RVO at a point in time, and the Partnership may recognize a mark-to-market liability for a shortfall in RINs at the end of each reporting period. To the extent that the Partnership does not have a sufficient number of RINs to satisfy the RVO as of the balance sheet date, the Partnership charges cost of sales for such deficiency based on the market price of the RINs as of the balance sheet date and records a liability representing the Partnership’s obligation to purchase RINs. The Partnership’s RVO deficiency was $0.3 million and $0.9 million at June 30, 2020 and December 31, 2019, respectively.
The Partnership may enter into RIN forward purchase and sales commitments. Total losses from firm non-cancellable commitments were immaterial at both June 30, 2020 and December 31, 2019.
Note 12. Related Party Transactions
The Partnership is a party to a Second Amended and Restated Services Agreement with Global Petroleum Corp. (“GPC”), an affiliate of the Partnership that is 100% owned by members of the Slifka family, pursuant to which the Partnership provides GPC with certain tax, accounting, treasury, legal, information technology, human resources and financial operations support services for which GPC pays the Partnership a monthly services fee at an agreed amount subject to the approval by the Conflicts Committee of the board of directors of the General Partner. The Second Amended and Restated Services Agreement is for an indefinite term and any party may terminate some or all of the services upon ninety (90) days’ advanced written notice. As of June 30, 2020, no such notice of termination was given by GPC or the Partnership.
The General Partner employs substantially all of the Partnership’s employees, except for most of its gasoline station and convenience store employees, who are employed by GMG. The Partnership reimburses the General Partner for expenses incurred in connection with these employees. These expenses, including bonus, payroll and payroll taxes, were $42.4 million and $28.8 million for the three months ended June 30, 2020 and 2019, respectively, and $70.2 million and $58.0 million for the six months ended June 30, 2020 and 2019, respectively. The Partnership also reimburses the General Partner for its contributions under the General Partner’s 401(k) Savings and Profit Sharing Plans and the General Partner’s qualified and non-qualified pension plans.
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The table below presents receivables from GPC and the General Partner (in thousands):
Receivables from GPC
53
Receivables from the General Partner (1)
7,471
7,770
In addition, the Partnership paid certain costs in connection with a compensation funding agreement with the General Partner. See Note 13, “Long-Term Incentive Plan–Repurchase Program.”
Note 13. Long-Term Incentive Plan
The Partnership has a Long-Term Incentive Plan, as amended (the “LTIP”), whereby a total of 4,300,000 common units were authorized for delivery with respect to awards under the LTIP. The LTIP provides for awards to employees, consultants and directors of the General Partner and employees and consultants of affiliates of the Partnership who perform services for the Partnership. The LTIP allows for the award of options, unit appreciation rights, restricted units, phantom units, distribution equivalent rights, unit awards and substitute awards. Awards granted pursuant to the LTIP vest pursuant to the terms of the grant agreements. Please read Note 17 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information on the LTIP.
The following table presents a summary of the non-vested phantom units granted under the LTIP:
Number of
Non-vested
Grant Date
Units
Fair Value ($)
Outstanding non—vested phantom units at December 31, 2019
562,906
9.74
Vested
(5,129)
25.84
Forfeited
(2,090)
9.28
Outstanding non—vested phantom units at June 30, 2020
555,687
9.59
The Partnership recorded total compensation expense related to the outstanding LTIP awards of $0.3 million and $0.8 million for the three months ended June 30, 2020 and 2019, respectively, and $0.6 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
The total compensation cost related to the non-vested awards not yet recognized at June 30, 2020 was approximately $2.1 million and is expected to be recognized ratably over the remaining requisite service periods.
Repurchase Program
In May 2009, the board of directors of the General Partner authorized the repurchase of the Partnership’s common units (the “Repurchase Program”) for the purpose of meeting the General Partner’s anticipated obligations to deliver common units under the LTIP and meeting the General Partner’s obligations under existing employment agreements and other employment related obligations of the General Partner (collectively, the “General Partner’s Obligations”). The General Partner is authorized to acquire up to 1,242,427 of its common units in the aggregate over an extended period of
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time, consistent with the General Partner’s Obligations. Common units may be repurchased from time to time in open market transactions, including block purchases, or in privately negotiated transactions. Such authorized unit repurchases may be modified, suspended or terminated at any time and are subject to price and economic and market conditions, applicable legal requirements and available liquidity. Since the Repurchase Program was implemented, the General Partner repurchased 868,505 common units pursuant to the Repurchase Program for approximately $25.1 million, of which approximately $0.3 million were purchased during each of the three and six months ended June 30, 2020.
In June 2009, the Partnership and the General Partner entered into the Global GP LLC Compensation Funding Agreement (the “Agreement”) whereby the Partnership and the General Partner established obligations and protocol for (i) the funding, management and administration of a compensation funding account and underlying General Partner’s Obligations, and (ii) the holding and disposition by the General Partner of common units acquired in accordance with the Agreement for such purposes as otherwise set forth in the Agreement. The Agreement requires the Partnership to fund costs that the General Partner incurs in connection with performance of the Agreement. In accordance with the Agreement, the Partnership paid members of the General Partner $0 for each of the three months ended June 30, 2020 and 2019, and $0.3 million in the aggregate for each of the six months ended June 30, 2020 and 2019.
Note 14. Partners’ Equity and Cash Distributions
Partners’ Equity
Common Units and General Partner Interest
At June 30, 2020, there were 33,995,563 common units issued, including 6,143,205 common units held by affiliates of the General Partner, including directors and executive officers, collectively representing a 99.33% limited partner interest in the Partnership, and 230,303 general partner units representing a 0.67% general partner interest in the Partnership. There have been no changes to common units or the general partner interest during the three and six months ended June 30, 2020.
Series A Preferred Units
At June 30, 2020, there were 2,760,000 9.75% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units issued representing limited partner interests (the “Series A Preferred Units”) for $25.00 per Series A Preferred Unit. There have been no changes to the Series A Preferred Units during the three and six months ended June 30, 2020.
Cash Distributions
Common Units
The Partnership intends to make cash distributions to common unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future earnings, capital requirements, financial condition and other factors. The Credit Agreement prohibits the Partnership from making cash distributions if any potential default or Event of Default, as defined in the Credit Agreement, occurs or would result from the cash distribution. The indentures governing the Partnership’s outstanding senior notes also limit the Partnership’s ability to make distributions to its common unitholders in certain circumstances.
Within 45 days after the end of each quarter, the Partnership will distribute all of its Available Cash (as defined in its partnership agreement) to common unitholders of record on the applicable record date. The amount of Available Cash is all cash on hand on the date of determination of Available Cash for the quarter; less the amount of cash reserves established by the General Partner to provide for the proper conduct of the Partnership’s businesses, to comply with
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applicable law, any of the Partnership’s debt instruments or other agreements or to provide funds for distributions to unitholders and the General Partner for any one or more of the next four quarters.
The Partnership will make distributions of Available Cash from distributable cash flow for any quarter in the following manner: 99.33% to the common unitholders, pro rata, and 0.67% to the General Partner, until the Partnership distributes for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter; and thereafter, cash in excess of the minimum quarterly distribution is distributed to the common unitholders and the General Partner based on the percentages as provided below.
As holder of the IDRs, the General Partner is entitled to incentive distributions if the amount that the Partnership distributes with respect to any quarter exceeds specified target levels shown below:
Marginal Percentage
Total Quarterly Distribution
Interest in Distributions
Target Amount
Unitholders
General Partner
First Target Distribution
up to $0.4625
99.33
0.67
Second Target Distribution
above $0.4625 up to $0.5375
86.33
13.67
Third Target Distribution
above $0.5375 up to $0.6625
76.33
23.67
Thereafter
above $0.6625
51.33
48.67
The Partnership paid the following cash distributions to common unitholders during 2020 (in thousands, except per unit data):
For the
Per Unit
Cash Distribution
Quarter
Cash
Incentive
Total Cash
Payment Date
Ended
Distribution
2/14/2020
12/31/19
0.52500
17,848
123
320
18,291
5/15/2020
03/31/20
13,385
91
13,476
In addition, on July 31, 2020, the board of directors of the General Partner declared a quarterly cash distribution of $0.45875 per unit ($1.8350 per unit on an annualized basis) on all of its outstanding common units for the period from April 1, 2020 through June 30, 2020. On August 14, 2020, the Partnership will pay this cash distribution to its common unitholders of record as of the close of business on August 10, 2020.
Distributions on the Series A Preferred Units are cumulative from August 7, 2018, the original issue date of the Series A Preferred Units, and payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing on November 15, 2018 (each, a “Distribution Payment Date”), to holders of record as of the opening of business on the February 1, May 1, August 1 or November 1 next preceding the Distribution Payment Date, in each case, when, as, and if declared by the General Partner out of legally available funds for such purpose. Distributions on the Series A Preferred Units will be paid out of Available Cash with respect to the quarter immediately preceding the applicable Distribution Payment Date.
The Partnership paid the following cash distributions on the Series A Preferred Units during 2020 (in thousands, except per unit data):
Quarterly Period
Covering
2/18/2020
11/15/19 - 2/14/20
2/15/20 - 5/14/20
In addition, on July 20, 2020, the board of directors of the General Partner declared a quarterly cash distribution of $0.609375 per unit ($2.4375 per unit on an annualized basis) on the Series A Preferred Units for the period from May 15, 2020 through August 14, 2020. This distribution will be payable on August 17, 2020 to holders of record as of the opening of business on August 3, 2020.
Note 15. Segment Reporting
Summarized financial information for the Partnership’s reportable segments is presented in the table below (in thousands):
Wholesale Segment:
Gasoline and gasoline blendstocks
516,326
1,634,618
1,414,783
2,640,323
Crude oil (1)
9,039
28,535
15,492
42,528
Other oils and related products (2)
251,994
341,375
834,562
1,030,883
Product margin
57,779
29,384
66,923
56,374
9,203
(798)
4,733
(7,024)
44,523
9,415
44,733
23,495
111,505
38,001
116,389
72,845
Gasoline Distribution and Station Operations Segment:
Station operations (3)
104,095
120,526
202,721
225,185
96,770
87,874
204,000
175,299
48,801
57,552
97,442
108,512
145,571
145,426
301,442
283,811
Commercial Segment:
3,003
4,546
8,918
11,004
Combined sales and Product margin:
Product margin (4)
260,079
187,973
426,749
367,660
Depreciation allocated to cost of sales
(20,132)
(20,830)
(41,064)
(43,673)
Combined gross profit
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Approximately 83 million gallons and 119 million gallons of the GDSO segment’s sales for the three months ended June 30, 2020 and 2019, respectively, and 188 million gallons and 230 million gallons of the GDSO segment’s sales for the six months ended June 30, 2020 and 2019, respectively, were supplied from petroleum products and renewable fuels sourced by the Wholesale segment. The Commercial segment’s sales were predominantly sourced by the Wholesale segment. These intra-segment sales are not reflected as sales in the Wholesale segment as they are eliminated.
A reconciliation of the totals reported for the reportable segments to the applicable line items in the consolidated financial statements is as follows (in thousands):
Operating costs and expenses not allocated to operating segments:
Total operating costs and expenses
The Partnership’s foreign assets and foreign sales were immaterial as of and for the three and six months ended June 30, 2020 and 2019.
Segment Assets
The Partnership’s terminal assets are allocated to the Wholesale and Commercial segments, and its retail gasoline stations are allocated to the GDSO segment. Due to the commingled nature and uses of the remainder of the Partnership’s assets, it is not reasonably possible for the Partnership to allocate these assets among its reportable segments.
The table below presents total assets by reportable segment at June 30, 2020 and December 31, 2019 (in thousands):
Unallocated
642,907
1,537,103
342,268
773,696
1,576,655
458,076
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Note 16. Income Taxes
Section 7704 of the Internal Revenue Code provides that publicly-traded partnerships are, as a general rule, taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,” exists under Section 7704(c) with respect to publicly-traded partnerships of which 90% or more of the gross income for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the transportation, storage and marketing of refined petroleum products, gasoline blendstocks, crude oil and ethanol to resellers and refiners. Other types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income.
Substantially all of the Partnership’s income is “qualifying income” for federal income tax purposes and, therefore, is not subject to federal income taxes at the partnership level. Accordingly, no provision has been made for income taxes on the qualifying income in the Partnership’s financial statements. Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the Partnership’s agreement of limited partnership. Individual unitholders have different investment basis depending upon the timing and price at which they acquired their common units. Further, each unitholder’s tax accounting, which is partially dependent upon the unitholder’s tax position, differs from the accounting followed in the Partnership’s consolidated financial statements. Accordingly, the aggregate difference in the basis of the Partnership’s net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder’s tax attributes in the Partnership is not available to the Partnership.
One of the Partnership’s wholly owned subsidiaries, GMG, is a taxable entity for federal and state income tax purposes. Current and deferred income taxes are recognized on the separate earnings of GMG. The after-tax earnings of GMG are included in the earnings of the Partnership. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes for GMG. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Partnership calculates its current and deferred tax provision based on estimates and assumptions that could differ from actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
The Partnership recognizes deferred tax assets to the extent that the recoverability of these assets satisfies the “more likely than not” criteria in accordance with the FASB’s guidance regarding income taxes. A valuation allowance must be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates, length of carryback and carryforward periods and projections of future operating results. The Partnership concluded, based on an evaluation of future operating results and reversal of existing taxable temporary differences, that a portion of these assets will not be realized in a future period. The valuation allowance decreased by an immaterial amount for the six months ended June 30, 2020.
The Partnership computed its tax provision for the three and six months ended June 30, 2020 based upon the year-to-date effective tax rate as opposed to an estimated annual effective tax rate. Given a reliable estimate of the annual effective tax rate cannot be made, the Partnership concluded that the year-to-date effective tax rate is the most appropriate method to use for the three and six months ended June 30, 2020.
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Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. The Partnership had gross-tax effected unrecognized tax benefits of $0 and $1.0 million at June 30, 2020 and December 31, 2019, respectively. The liability for unrecognized tax benefits for uncertain tax positions changed by $1.0 million for the six months ended June 30, 2020 as a result of closure of various statutes of limitations.
GMG files income tax returns in the United States and various state jurisdictions. As of June 30, 2020, with few exceptions, the Partnership was subject to income tax examination by tax authorities for all years dated back to 2016.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides certain tax changes in response to the COVID-19 pandemic, including the temporary removal of certain limitations on the utilization of net operating losses, permitting the carryback of net operating losses generated in 2018, 2019 or 2020 to the five preceding taxable years, increasing the ability to deduct interest expense, deferring the employer share of social security tax payments, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As a result, the Partnership recognized a benefit of $6.3 million related to the CARES Act net operating loss carryback provisions which is included in income tax benefit in the accompanying statement of operations for the six months ended June 30, 2020. The Partnership expects to receive cash refunds totaling $15.8 million associated with the carryback of losses generated in 2018 to the 2016 and 2017 tax years, and this income tax receivable is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet as of June 30, 2020.
Note 17. Changes in Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss by component for the periods presented (in thousands):
Pension
Derivatives Designated as
Plan
Other comprehensive income before reclassification of (gain) loss
2,403
5,421
7,824
Amount of (gain) loss reclassified from accumulated other comprehensive income (loss)
(43)
(234)
(277)
Total comprehensive income
(5,696)
(533)
4,888
(87)
(321)
Amounts are presented prior to the income tax effect on other comprehensive income. Given the Partnership’s partnership status for federal income tax purposes, the effective tax rate is immaterial.
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Note 18. Legal Proceedings
Although the Partnership may, from time to time, be involved in litigation and claims arising out of its operations in the normal course of business, the Partnership does not believe that it is a party to any litigation that will have a material adverse impact on its financial condition or results of operations. Except as described below and in Note 11 included herein, the Partnership is not aware of any significant legal or governmental proceedings against it or contemplated to be brought against it. The Partnership maintains insurance policies with insurers in amounts and with coverage and deductibles as its general partner believes are reasonable and prudent. However, the Partnership can provide no assurance that this insurance will be adequate to protect it from all material expenses related to potential future claims or that these levels of insurance will be available in the future at economically acceptable prices.
On June 1, 2020, Basin Transload filed for reorganization in the United States Bankruptcy Court for the District of Delaware under Chapter 11 of the United States Bankruptcy Code. The Partnership believes that the filing for reorganization and the resulting adjudication thereof will not have a material adverse effect on its financial condition, results of operations and cash available for distribution to its unitholders.
On January 31, 2020, the Partnership and Global Operating LLC (“Global Operating”) received a notice of arbitration filed against them by the minority members of Basin Transload alleging, among other things, mismanagement by the Partnership and Global Operating of certain business arrangements of Basin Transload. Global Operating served its notice of defense, will vigorously defend its position and believes it has meritorious defenses to the filing. The Partnership believes that it is not subject to the jurisdiction of the arbitration and filed a notice of non-jurisdiction. On February 20, 2020, the Partnership filed a breach of contract claim against the minority members of Basin Transload in the United States District Court of Massachusetts, demanding damages in excess of $5.0 million. On April 9, 2020, the Partnership filed its claim in the Superior Court of Middlesex County, Massachusetts, and voluntarily withdrew its claim in the United States District Court of Massachusetts on April 10, 2020. The Partnership’s claim arises in connection with the Partnership’s payment in October 2017 of approximately $13.1 million to Tesoro in accordance with the Partnership’s guaranty of a pipeline connection agreement between Basin Transload and Tesoro. In breach of a separate agreement among the Partnership and the minority members, each of the minority members of Basin Transload failed to reimburse the Partnership for 20% of any payments made by the Partnership to Tesoro in connection with the pipeline connection agreement. On April 13, 2020, the minority members of Basin Transload filed an action in the District Court of the Northwest Judicial District, Divide County, North Dakota, to, among other things, compel the Partnership to arbitration and seek a declaration that the minority members of Basin Transload are not liable to the Partnership for the breach of contract claim. The Partnership denies the allegations set forth in the North Dakota action and believes it has meritorious defenses to the filing.
During the second quarter ended June 30, 2016, the Partnership determined that gasoline loaded from certain loading bays at one of its terminals did not contain the necessary additives as a result of an IT-related configuration error. The error was corrected, and all gasoline being sold at the terminal now contains the appropriate additives. Based upon current information, the Partnership believes approximately 14 million gallons of gasoline were impacted. The Partnership has notified the EPA of this error. As a result of this error, the Partnership could be subject to fines, penalties and other related claims, including customer claims.
On August 2, 2016, the Partnership received a Notice of Violation (“NOV”) from the EPA, alleging that permits for the Partnership’s petroleum product transloading facility in Albany, New York (the “Albany Terminal”), issued by the New York State Department of Environmental Conservation (“NYSDEC”) between August 9, 2011 and November 7, 2012, violated the Clean Air Act (the “CAA”) and the federally enforceable New York State
37
Implementation Plan (“SIP”) by increasing throughput of crude oil at the Albany Terminal without complying with the New Source Review (“NSR”) requirements of the SIP. The Partnership denied the allegations and the NYSDEC did not issue any such NOV. The Albany Terminal is a 63-acre licensed, permitted and operational stationary bulk petroleum storage and transfer terminal that currently consists of petroleum product storage tanks, along with truck, rail and marine loading facilities, for the storage, blending and distribution of various petroleum and related products, including gasoline, ethanol, distillates, heating and crude oils. The applicable permits issued by the NYSDEC to the Partnership in 2011 and 2012 specifically authorized the Partnership to increase the throughput of crude oil at the Albany Terminal. According to the allegations in the NOV, the NYSDEC permit actions should have been treated as a major modification under the NSR program, requiring additional emission control measures and compliance with other NSR requirements. The NYSDEC has not alleged that the Partnership’s permits were subject to the NSR program and the NYSDEC never issued an NOV in the matter. The CAA authorizes the EPA to take enforcement action if there are violations of the New York SIP seeking compliance and penalties. The Partnership has denied the NOV allegations and asserts that the permits issued by the NYSDEC comply with the CAA and applicable state air permitting requirements and that no material violation of law occurred. The Partnership disputed the claims alleged in the NOV and first responded to the EPA in September 2016. The Partnership met with the EPA and provided additional information at the agency’s request. On December 16, 2016, the EPA proposed a Settlement Agreement in a letter to the Partnership relating to the allegations in the NOV. On January 17, 2017, the Partnership responded to the EPA indicating that the EPA had failed to explain or provide support for its allegations and that the EPA needed to better explain its positions and the evidence on which it was relying. The EPA did not respond with such evidence, but instead has requested that the Partnership enter into a series of tolling agreements. The Partnership signed the tolling agreements with respect to this matter, as requested by the EPA, and such agreements currently extend through December 31, 2020. To date, the EPA has not taken any further formal action with respect to the NOV.
By letter dated January 25, 2017, the Partnership received a notice of intent to sue (the “2017 NOI”) from Earthjustice related to alleged violations of the CAA; specifically alleging that the Partnership was operating the Albany Terminal without a valid CAA Title V Permit. On February 9, 2017, the Partnership responded to Earthjustice advising that the 2017 NOI was without factual or legal merit and that the Partnership would move to dismiss any action commenced by Earthjustice. No action was taken by either the EPA or the NYSDEC with regard to the Earthjustice allegations. At this time, there has been no further action taken by Earthjustice. Neither the EPA nor the NYSDEC has followed up on the 2017 NOI. The Albany Terminal is currently operating pursuant to its Title V Permit, which has been extended in accordance with the State Administrative Procedures Act. Additionally, the Partnership has submitted a Title V Permit renewal and a request for modifications to its existing Title V Permit. The Partnership believes that it has meritorious defenses against all allegations.
On March 26, 2015, the Partnership received a Notice of Non-Compliance (“NON”) from the Massachusetts Department of Environmental Protection (“DEP”) with respect to the Revere terminal (the “Revere Terminal”) located in Boston Harbor in Revere, Massachusetts, alleging certain violations of the National Pollutant Discharge Elimination System Permit (“NPDES Permit”) related to storm water discharges. The NON required the Partnership to submit a plan to remedy the reported violations of the NPDES Permit. The Partnership has responded to the NON with a plan and has implemented modifications to the storm water management system at the Revere Terminal in accordance with the plan. The Partnership has requested that the DEP acknowledge completion of the required modifications to the storm water management system in satisfaction of the NON. While no response has yet been received, the Partnership believes that compliance with the NON has been achieved, and implementation of the plan will have no material impact on its operations.
The Partnership received letters from the EPA dated November 2, 2011 and March 29, 2012, containing requirements and testing orders (collectively, the “Requests for Information”) for information under the CAA. The Requests for Information were part of an EPA investigation to determine whether the Partnership has violated sections of the CAA at certain of its terminal locations in New England with respect to residual oil and asphalt. On June 6, 2014, a NOV was received from the EPA, alleging certain violations of its Air Emissions License issued by the Maine
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Department of Environmental Protection, based upon the test results at the South Portland, Maine terminal. The Partnership met with and provided additional information to the EPA with respect to the alleged violations. On April 7, 2015, the EPA issued a Supplemental Notice of Violation modifying the allegations of violations of the terminal’s Air Emissions License. The Partnership has entered into a consent decree (the “Consent Decree”) with the EPA and the United States Department of Justice (the “Department of Justice”), which was filed in the U.S. District Court for the District of Maine (the “Court”) on March 25, 2019. The Consent Decree was entered by the Court on December 19, 2019. The Partnership believes that compliance with the Consent Decree and implementation of the requirements of the Consent Decree will have no material impact on its operations.
Note 19. New Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Partnership’s consolidated financial statements, from those disclosed in the Partnership’s 2019 Annual Report on Form 10-K, except for the following:
Accounting Standards or Updates Recently Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Partnership adopted this standard on January 1, 2020 with no material impact on the Partnership’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement,” which amends existing guidance on disclosure requirements for fair value measurements. This standard requires prospective application on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. The effects of other amendments must be applied retrospectively to all periods presented. The Partnership adopted this standard on January 1, 2020 with no material impact on the Partnership’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” and has modified the standard thereafter, now codified as ASC 326. ASC 326 requires that for most financial assets, losses be based on an expected loss approach, which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. The Partnership adopted this standard on January 1, 2020 using the modified retrospective transition method. The adoption of this standard did not materially impact the measurement of the Partnership’s credit loss recognition and, therefore, did not have a material impact on the recognition of expected credit losses on the Partnership’s consolidated financial statements.
The Partnership is exposed to credit losses primarily through its sales of refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane. Concentration of credit risk with respect to trade receivables are limited due to the Partnership’s customer base being large and diverse. The Partnership assesses each counterparty’s ability to pay for the products the Partnership sells by conducting a credit review. This credit review considers the Partnership’s expected billing exposure and timing for payment and the counterparty’s established credit rating or, in the case when a credit rating is not available, the Partnership’s assessment of the counterparty’s creditworthiness based on the Partnership’s analysis of the counterparty’s financial statements. The Partnership also considers contract terms and conditions and business strategy in its evaluation. A credit limit is established for each counterparty based on the outcome of this review. The Partnership may require collateralized asset support in the form of standby letters of credit, personal or corporate guarantees and/or a prepayment to mitigate credit risk.
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The Partnership monitors its ongoing credit exposure through active reviews of counterparty balances against contract terms and due dates. The Partnership’s historical experience of collecting receivables, supported by the level of default, is that credit risk is low across classes of customers and locations and trade receivables are considered to be a single class of financial assets. Impairment for trade receivables are calculated for specific receivables with known or anticipated issues affecting the likelihood of collectability and for balances past due with a probability of default based on historical data as well as relevant forward-looking information. The Partnership’s activities include timely account reconciliations, dispute resolutions and payment confirmations. The Partnership utilizes internal legal counsel or collection agencies and outside legal counsel to pursue recovery of defaulted receivables.
Based on an aging analysis at June 30, 2020, approximately 98% of the Partnership’s accounts receivable were outstanding less than 30 days.
The following table presents changes in the credit loss allowance included in accounts receivable, net in the accompanying balance sheet (in thousands):
Credit Loss
Allowance
2,729
Current period provision
Write-offs charged against allowance for credit losses
(11)
Recoveries collected
165
3,243
Accounting Standards or Updates Not Yet Effective
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Partnership does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Note 20. Subsequent Events
Distribution to Common Unitholders—On July 31, 2020, the board of directors of the General Partner declared a quarterly cash distribution of $0.45875 per unit ($1.8350 per unit on an annualized basis) for the period from April 1, 2020 through June 30, 2020. On August 14, 2020, the Partnership will pay this cash distribution to its common unitholders of record as of the close of business on August 10, 2020
Distribution to Preferred Unitholders—On July 20, 2020, the board of directors of the General Partner declared a quarterly cash distribution of $0.609375 per unit ($2.4375 per unit on an annualized basis) on the Series A Preferred Units, covering the period from May 15, 2020 through August 14, 2020. This distribution will be payable on August 17, 2020 to holders of record as of the opening of business on August 3, 2020.
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Note 21. Supplemental Guarantor Condensed Consolidating Financial Statements
The Partnership’s wholly owned subsidiaries, other than GLP Finance, are guarantors of senior notes issued by the Partnership and GLP Finance. As such, the Partnership is subject to the requirements of Rule 3-10 of Regulation S-X of the SEC regarding financial statements of guarantors and issuers of registered guaranteed securities. The Partnership presents condensed consolidating financial information for its subsidiaries within the notes to consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(d).
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of June 30, 2020 and December 31, 2019, the Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2020 and 2019 and the Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2020 and 2019 of the Partnership’s 100% owned guarantor subsidiaries, the non-guarantor subsidiary and the eliminations necessary to arrive at the information for the Partnership on a consolidated basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
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Condensed Consolidating Balance Sheet
(Issuer)
Non-
Guarantor
Subsidiaries
Subsidiary
Eliminations
Consolidated
9,027
1,331
232,594
171
(67)
93,146
251
767,156
1,820
1,073,386
281,960
65
2,518,695
3,583
162,822
529
Accounts payable—affiliates
(26)
70,604
94,403
183
426,340
756
223,504
2,012,973
799
Partners' equity
Global Partners LP equity
505,722
1,700
Total partners' equity
2,784
Total liabilities and partners' equity
42
11,591
451
412,853
(3)
81,845
95
1,003,624
888
1,102,644
2,219
296,672
2,805,246
3,181
Liabilities and partners' equity
373,355
(17)
68,143
102,737
753,757
130
239,308
2,349,017
456,229
1,836
3,010
Condensed Consolidating Statement of Operations
1,469,017
780
(220)
1,229,572
278
239,445
502
58,182
835
76,323
391
138,131
1,226
Operating income (loss)
101,314
(724)
Income (loss) before income tax expense
80,225
Income tax expense
76,697
(435)
Less: General partners' interest in net income, including incentive distribution rights
74,504
44
3,507,137
(123)
3,340,184
166,953
190
40,867
101
86,068
383
128,784
484
38,169
(294)
Income before income tax expense
15,103
14,665
(176)
12,617
4,063,825
1,111
(266)
3,678,689
385,136
549
99,006
934
158,426
841
264,513
1,775
120,623
(1,226)
Income before income tax benefit
77,933
Income tax benefit
80,274
(736)
76,377
46
6,486,499
885
(218)
6,162,384
1,013
324,115
(128)
81,859
199
168,597
798
255,341
997
68,774
(1,125)
22,752
22,290
(675)
18,256
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Condensed Consolidating Statement Cash Flows
Net cash provided by operating activities
162,123
(120)
Net payments on working capital revolving credit facility
(600)
1,000
Net cash used in financing activities
(147,835)
Decrease in cash and cash equivalents
(2,564)
880
48
Net cash used in operating activities
(32,879)
(613)
Net borrowings from working capital revolving credit facility
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
2,938
7,050
1,071
9,988
458
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations of Global Partners LP should be read in conjunction with the historical consolidated financial statements of Global Partners LP and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Some of the information contained in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “may,” “believe,” “should,” “could,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “continue,” “will likely result,” or other similar expressions. In addition, any statement made by our management concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions by us are also forward-looking statements. Forward-looking statements are not guarantees of performance. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks, many of which are beyond our control, which may cause future results to be materially different from the results stated or implied in this document. These risks and uncertainties include, among other things:
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Additional information about risks and uncertainties that could cause actual results to differ 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, 2019 and Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.
We expressly disclaim any obligation or undertaking to update these statements to reflect any change in our expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based, other than as required by federal and state securities laws. All forward-looking statements included in this Quarterly Report on Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.
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Overview
We are a master limited partnership formed in March 2005. We own, control or have 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”). We are one of the region’s largest independent owners, suppliers and operators of gasoline stations and convenience stores. As of June 30, 2020, we had a portfolio of 1,532 owned, leased and/or supplied gasoline stations, including 277 directly operated convenience stores, primarily in the Northeast. We are also one of the largest distributors of gasoline, distillates, residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York. We engage in the purchasing, selling, gathering, blending, storing and logistics of transporting petroleum and related products, including gasoline and gasoline blendstocks (such as ethanol), distillates (such as home heating oil, diesel and kerosene), residual oil, renewable fuels, crude oil and propane and in the transportation of petroleum products and renewable fuels by rail from the mid-continent region of the United States and Canada.
Collectively, we sold approximately $1.4 billion and $3.9 billion of refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane for the three and six months ended June 30, 2020, respectively. In addition, we had other revenues of approximately $0.1 billion and $0.2 billion for the three and six months ended June 30, 2020, respectively, from convenience store sales at our directly operated stores, rental income from dealer leased and commissioned agent leased gasoline stations and from cobranding arrangements, and sundries.
We base our pricing on spot prices, fixed prices or indexed prices and routinely use the New York Mercantile Exchange (“NYMEX”), Chicago Mercantile Exchange (“CME”) and Intercontinental Exchange (“ICE”) or other counterparties to hedge the risk inherent in buying and selling commodities. Through the use of regulated exchanges or derivatives, we seek to maintain a position that is substantially balanced between purchased volumes and sales volumes or future delivery obligations.
Our Perspective on Global and the COVID-19 Pandemic
The COVID-19 pandemic has continued to make its presence felt at home, in the office workplace and at our retail sites and terminal locations. We have successfully executed our business continuity plans and at this time we continue to work remotely. We remain active in responding to the challenges posed by the COVID-19 pandemic and continue to provide essential products and services while prioritizing the safety of our employees, customers and vendors in the communities where we operate.
The COVID-19 pandemic has resulted in an economic downturn and restricted travel to, from and within the states in which we conduct our businesses. Federal, state and municipal “stay at home” or similar-like directives have resulted in decreases in the demand for gasoline and convenience store products. Social distancing guidelines and directives limiting food operations at our convenience stores have further contributed to a reduction in in-store traffic and sales. The demand for diesel fuel has similarly (but not as drastically) been impacted. We remain well positioned to pivot and address different (and, at times, conflicting) directives from federal, state and municipal authorities designed to mitigate the spread of the COVID-19 pandemic, permit the opening of businesses and promote an economic recovery. From mid-March into April, we saw reductions of more than 50% in gasoline volume and more than 20% in convenience store sales but saw gradual increases in both gasoline volume and convenience store sales during the remainder of the second quarter as businesses reopened and directives from federal, state and municipal authorities became less restrictive. That said, uncertainties surrounding the duration of the COVID-19 pandemic and demand at the pump, inside our stores and at our terminals remain.
Second Quarter 2020 Performance
During March, the COVID-19 pandemic-related demand destruction and the price war between Saudi Arabia and Russia caused a rapid decline in fuel prices. The price of crude oil (WTI) fell from $46.75/barrel on March 2, 2020 to $20.48/barrel on March 31, 2020. Similarly, the price of wholesale gasoline (87 RBOB) on the NYMEX fell from $1.54/gallon to $0.57/gallon during the same timeframe, steepening the forward product pricing curve. During the first quarter of 2020, this decline in prices had a positive impact on fuel margin in our GDSO segment, but a negative impact on the product margins in our Wholesale segment which decreased $29.9 million year over year.
In the second quarter, margins in our Wholesale segment increased $73.5 million year over year due to a significant recovery in the supply/demand imbalance at the end of the first quarter and resultant flattening of the forward product pricing curve. In our GDSO segment, while volumes decreased year over year, fuel margins remained strong resulting in a $9.0 million increase in gasoline distribution product margin which offset an $8.8 million decrease in our station operations product margin, primarily due to a decrease in store traffic.
Given the uncertainty surrounding the short-term and long-term impacts of COVID-19, including the timing of an economic recovery, early in the second quarter we took certain steps to increase liquidity and create additional financial flexibility. Such steps included a 25% decrease to our quarterly distribution on our common units for the period from January 1, 2020 to March 31, 2020. In addition, we borrowed $50.0 million under our revolving credit facility which was included in cash on our balance sheet. We also reduced planned expenses and 2020 capital spending. We amended our credit agreement to provide temporary adjustments to certain covenants. Given the stronger-than-expected performance in the second quarter, we paid down our revolving credit facility with the $50.0 million cash on hand and increased our planned 2020 capital spending. In addition, we increased our quarterly distribution on our common units for the period from April 1, 2020 to June 30, 2020.
Moving Forward – Our Perspective
In July, while we have seen a slight uptick in transportation fuels volume and convenience store sales, volume and sales are lower year over year. Fuel margins (cents per gallon) in our GDSO segment have declined but remain above prior year margins. We could reasonably expect volumes and sales to continue to increase assuming more of the economy “re-opens” and more people travel. However, the extent to which the COVID-19 pandemic may affect our operating results remains uncertain. The outbreak of the COVID-19 pandemic has had, and may continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition and results of operations and those of our customers, suppliers and other counterparties.
Our inventory management is dependent on the use of hedging instruments which are managed based on the structure of the forward pricing curve. Daily market changes may impact periodic results due to the point-in-time valuation of these positions. Volatility in the oil markets resulting from COVID-19 and geopolitical events may impact our results.
Business operations today, as compared to how we conducted our business in early March, reflect changes which may well remain for an indefinite period of time. In these uncertain times and volatile markets, we believe that we are operationally nimble and that our portfolio of assets may continue to provide us with opportunities.
Amended Credit Agreement—On May 7, 2020, we and certain of our subsidiaries entered into the fourth amendment to third amended and restated credit agreement which, among other things, provides temporary adjustments to certain covenants and reduces the total aggregate commitment by $130.0 million. See “—Liquidity and Capital Resources—Credit Agreement.”
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Operating Segments
We purchase refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane primarily from domestic and foreign refiners and ethanol producers, crude oil producers, major and independent oil companies and trading companies. We operate our businesses under three segments: (i) Wholesale, (ii) Gasoline Distribution and Station Operations (“GDSO”) and (iii) Commercial.
In our Wholesale segment, we engage in the logistics of selling, gathering, blending, storing and transporting refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane. We transport these products by railcars, barges, trucks and/or pipelines pursuant to spot or long-term contracts. From time to time, we aggregate crude oil by truck or pipeline in the mid-continent region of the United States and Canada, transport it by rail and ship it by barge to refiners. We sell home heating oil, branded and unbranded gasoline and gasoline blendstocks, diesel, kerosene, residual oil and propane to home heating oil and propane retailers and wholesale distributors. Generally, customers use their own vehicles or contract carriers to take delivery of the gasoline, distillates and propane at bulk terminals and inland storage facilities that we own or control or at which we have throughput or exchange arrangements. Ethanol is shipped primarily by rail and by barge.
In our Wholesale segment, we obtain Renewable Identification Numbers (“RIN”) in connection with our purchase of ethanol which is used for bulk trading purposes or for blending with gasoline through our terminal system. A RIN is a renewable identification number associated with government-mandated renewable fuel standards. 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”). Our U.S. Environmental Protection Agency (“EPA”) obligations relative to renewable fuel reporting are comprised of foreign gasoline and diesel that we may import and blending operations at certain facilities.
Gasoline Distribution and Station Operations
In our GDSO segment, gasoline distribution includes sales of branded and unbranded gasoline to gasoline station operators and sub-jobbers. Station operations include (i) convenience stores, (ii) rental income from gasoline stations leased to dealers, from commissioned agents and from cobranding arrangements and (iii) sundries (such as car wash sales and lottery and ATM commissions).
As of June 30, 2020, we had a portfolio of owned, leased and/or supplied gasoline stations, primarily in the Northeast, that consisted of the following:
Company operated
277
Commissioned agents
257
Lessee dealers
211
Contract dealers
787
1,532
At our company-operated stores, we operate the gasoline stations and convenience stores with our employees, and we set the retail price of gasoline at the station. At commissioned agent locations, we own the gasoline inventory, and we set the retail price of gasoline at the station and pay the commissioned agent a fee related to the gallons sold. We receive rental income from commissioned agent leased gasoline stations for the leasing of the convenience store premises, repair bays and other businesses that may be conducted by the commissioned agent. At dealer-leased locations, the dealer purchases gasoline from us, and the dealer sets the retail price of gasoline at the dealer’s station. We also receive rental income from (i) dealer-leased gasoline stations and (ii) cobranding arrangements. We also supply gasoline to locations owned and/or leased by independent contract dealers. Additionally, we have contractual relationships with distributors in certain New England states pursuant to which we source and supply these distributors’ gasoline stations with ExxonMobil-branded gasoline.
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In our Commercial segment, we include sales and deliveries to end user customers in the public sector and to large commercial and industrial end users of unbranded gasoline, home heating oil, diesel, kerosene, residual oil and bunker fuel. In the case of public sector commercial and industrial end user customers, we sell products primarily either through a competitive bidding process or through contracts of various terms. We respond to publicly issued requests for product proposals and quotes. We generally arrange for the delivery of the product to the customer’s designated location. Our Commercial segment also includes sales of custom blended fuels delivered by barges or from a terminal dock to ships through bunkering activity.
Seasonality
Due to the nature of our businesses and our reliance, in part, on consumer travel and spending patterns, we may experience more demand for gasoline 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 we operate, increasing the demand for gasoline. Therefore, our volumes in gasoline are typically higher in the second and third quarters of the calendar year. However, the COVID-19 pandemic has had a negative impact on gasoline demand and the extent and duration of that impact is uncertain. As demand for some of our 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 volumes are generally higher during the first and fourth quarters of the calendar year. These factors may result in fluctuations in our quarterly operating results.
Outlook
This section identifies certain risks and certain economic or industry-wide factors, in addition to those described under “—Our Perspective on Global and the COVID-19 Pandemic,” that may affect our financial performance and results of operations in the future, both in the short-term and in the long-term. Our results of operations and financial condition depend, in part, upon the following:
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Higher prices and new technologies and alternative fuel sources, such as electric, hybrid or battery powered motor vehicles, could reduce the demand for transportation fuels and adversely impact our sales of transportation fuels. A reduction in sales of transportation fuels could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders. In addition, increased conservation and technological advances have adversely affected the demand for home heating oil and residual oil. Consumption of residual oil has steadily declined over the last three decades. We could face additional competition from alternative energy sources as a result of future government-mandated controls or regulations further promoting the use of cleaner fuels. End users who are dual-fuel users have the ability to switch between residual oil and natural gas. Other end users may elect to convert to natural gas. During a period of increasing residual oil prices relative to the prices of natural gas, dual-fuel customers may switch and other end users may convert to natural gas. During periods of increasing home heating oil prices relative to the price of natural gas, residential users of home heating oil may also convert to natural gas. As described above, such switching or conversion could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders.
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Results of Operations
Evaluating Our Results of Operations
Our management uses a variety of financial and operational measurements to analyze our performance. These measurements include: (1) product margin, (2) gross profit, (3) earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA, (4) distributable cash flow, (5) selling, general and administrative expenses (“SG&A”), (6) operating expenses and (7) degree days.
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Product Margin
We view product margin as an important performance measure of the core profitability of our operations. We review product margin monthly for consistency and trend analysis. We define product margin as our product sales minus product costs. Product sales primarily include sales of unbranded and branded gasoline, distillates, residual oil, renewable fuels, crude oil and propane, as well as convenience store sales, gasoline station rental income and revenue generated from our logistics activities when we engage in the storage, transloading and shipment of products owned by others. Product costs include the cost of acquiring products and all associated costs including shipping and handling costs to bring such products to the point of sale as well as product costs related to convenience store items and costs associated with our logistics activities. We also look at product margin on a per unit basis (product margin divided by volume). Product margin is a non-GAAP financial measure used by management and external users of our consolidated financial statements to assess our business. Product margin should not be considered an alternative to net income, operating income, cash flow from operations, or any other measure of financial performance presented in accordance with GAAP. In addition, our product margin may not be comparable to product margin or a similarly titled measure of other companies.
Gross Profit
We define gross profit as our product margin minus terminal and gasoline station related depreciation expense allocated to cost of sales.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP financial measures used as supplemental financial measures by management and may be used by external users of our consolidated financial statements, such as investors, commercial banks and research analysts, to assess:
Adjusted EBITDA is EBITDA further adjusted for gains or losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Distributable Cash Flow
Distributable cash flow is an important non-GAAP financial measure for our limited partners since it serves as an indicator of our success in providing a cash return on their investment. Distributable cash flow as defined by our
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partnership agreement is net income plus depreciation and amortization minus maintenance capital expenditures, as well as adjustments to eliminate items approved by the audit committee of the board of directors of our general partner that are extraordinary or non-recurring in nature and that would otherwise increase distributable cash flow.
Distributable cash flow as used in our partnership agreement also determines our ability to make cash distributions on our incentive distribution rights. The investment community also uses a distributable cash flow metric similar to the metric used in our partnership agreement with respect to publicly traded partnerships to indicate whether or not such partnerships have generated sufficient earnings on a current or historic level that can sustain distributions on preferred or common units or support an increase in quarterly cash distributions on common units. Our partnership agreement does not permit adjustments for certain non-cash items, such as net losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges.
Distributable cash flow should not be considered as an alternative to net income, operating income, cash flow from operations, or any other measure of financial performance presented in accordance with GAAP. In addition, our distributable cash flow may not be comparable to distributable cash flow or similarly titled measures of other companies.
Selling, General and Administrative Expenses
Our SG&A expenses include, among other things, marketing costs, corporate overhead, employee salaries and benefits, pension and 401(k) plan expenses, discretionary bonuses, non-interest financing costs, professional fees and information technology expenses. Employee-related expenses including employee salaries, discretionary bonuses and related payroll taxes, benefits, and pension and 401(k) plan expenses are paid by our general partner which, in turn, are reimbursed for these expenses by us.
Operating Expenses
Operating expenses are costs associated with the operation of the terminals, transload facilities and gasoline stations and convenience stores used in our businesses. Lease payments, maintenance and repair, property taxes, utilities, credit card fees, taxes, labor and labor-related expenses comprise the most significant portion of our operating expenses. While the majority of these expenses remains relatively stable, independent of the volumes through our system, they can fluctuate slightly depending on the activities performed during a specific period. In addition, they can be impacted by new directives issued by federal, state and local governments.
Degree Days
A “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average temperature departs from a human comfort level of 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course 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 than usual. Degree days are officially observed by the National Weather Service and officially archived by the National Climatic Data Center. For purposes of evaluating our results of operations, we use the normal heating degree day amount as reported by the National Weather Service at its Logan International Airport station in Boston, Massachusetts.
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Key Performance Indicators
The following table provides a summary of some of the key performance indicators that may be used to assess our results of operations. These comparisons are not necessarily indicative of future results (gallons and dollars in thousands):
EBITDA (1)
125,658
63,970
170,334
122,011
Adjusted EBITDA (1)
126,571
62,842
171,990
121,436
Distributable cash flow (2)(3)
95,816
28,116
117,801
55,876
Volume (gallons)
794,350
1,054,285
1,793,662
2,062,185
Crude oil (4)
Other oils and related products (5)
278,561
411,016
629,983
790,750
Station operations (6)
125,243
183,250
288,493
374,756
Combined sales and product margin:
Product margin (7)
GDSO portfolio as of June 30, 2020 and 2019:
295
252
226
794
Total GDSO portfolio
1,567
62
Weather conditions:
Normal heating degree days
784
3,654
Actual heating degree days
927
653
3,248
3,377
Variance from normal heating degree days
Variance from prior period actual heating degree days
(18)
(4)
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The following table presents reconciliations of EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial measures on a historical basis for each period presented (in thousands):
Reconciliation of net income to EBITDA and Adjusted EBITDA:
Depreciation and amortization, excluding the impact of noncontrolling interest
24,779
25,977
50,447
53,912
Interest expense, excluding the impact of noncontrolling interest
21,089
23,066
42,690
46,022
Income tax expense (benefit)
3,528
438
(2,341)
462
EBITDA
Adjusted EBITDA
Reconciliation of net cash provided by (used in) operating activities to EBITDA and Adjusted EBITDA:
24,086
53,545
Net changes in operating assets and liabilities and certain non-cash items
76,767
(13,069)
(32,300)
108,967
Net cash from operating activities and changes in operating assets and liabilities attributable to noncontrolling interest
(10)
282
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The following table presents reconciliations of distributable cash flow to the most directly comparable GAAP financial measures on a historical basis for each period presented (in thousands):
Reconciliation of net income to distributable cash flow:
Amortization of deferred financing fees and senior notes discount
1,306
1,600
3,327
Amortization of routine bank refinancing fees
(985)
(890)
(1,925)
(1,912)
Maintenance capital expenditures, excluding the impact of noncontrolling interest
(5,546)
(13,060)
(12,826)
(21,066)
Distributable cash flow (1)(2)
Distributions to Series A preferred unitholders (3)
(3,364)
Distributable cash flow after distributions to Series A preferred unitholders
94,134
26,434
114,437
52,512
Reconciliation of net cash provided by (used in) operating activities to distributable cash flow:
Consolidated Sales
Our total sales were $1.5 billion and $3.5 billion for the three months ended June 30, 2020 and 2019, respectively, a decrease of $2.0 billion, or 58.1%, due to decreases in prices and volume sold. Our aggregate volume of product sold was 1.2 billion gallons and 1.6 billion gallons for the three months ended June 30, 2020 and 2019, respectively, declining by 450 million gallons including decreases of 260 million gallons in our Wholesale segment, due to a decline in gasoline and gasoline blendstocks partially offset by increased volume in other oils and related products, 132 million gallons in our GDSO segment and 58 million gallons in our Commercial segment.
Our total sales were $4.1 billion and $6.5 billion for the six months ended June 30, 2020 and 2019, respectively, a decrease of $2.4 billion, or 37%, due to decreases in prices and volume sold. Our aggregate volume of product sold was 2.7 billion gallons and 3.2 billion gallons for the six months ended June 30, 2020 and 2019, respectively, declining by 515 million gallons including decreases of 268 million gallons in our Wholesale segment, primarily in gasoline and
gasoline blendstocks partially offset by increased volume in other oils and related products, 161 million gallons in our GDSO segment and 86 million gallons in our Commercial segment.
Our gross profit was $239.9 million and $167.1 million for the three months ended June 30, 2020 and 2019, respectively, an increase of $72.8 million, or 44%, primarily due to more favorable market conditions in our Wholesale segment. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our Wholesale segment in the quarter. Our gross profit also benefitted from higher fuel margins (cents per gallon) in gasoline distribution in our GDSO segment which offset a decrease in fuel volume and a decrease in our station operations product margin.
Our gross profit was $385.7 million and $324.0 million for the six months ended June 30, 2020 and 2019, respectively, an increase of $61.7 million, or 19%, primarily due to more favorable market conditions in our Wholesale segment in the second quarter. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our Wholesale segment in the quarter. Our gross profit also benefitted from higher fuel margins (cents per gallon) in our GDSO segment.
Results for Wholesale Segment
Gasoline and Gasoline Blendstocks. Sales from wholesale gasoline and gasoline blendstocks were $0.5 billion and $1.6 billion for the three months ended June 30, 2020 and 2019, respectively, a decrease of $1.1 billion, or 68%, due to a decrease in volume sold and in prices period over period. Our gasoline and gasoline blendstocks product margin was $57.8 million and $29.4 million for the three months ended June 30, 2020 and 2019, respectively, an increase of $28.4 million, or 96%, primarily due to more favorable market conditions compared to the same period in 2019. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our product margins in the quarter.
Sales from wholesale gasoline and gasoline blendstocks were $1.4 billion and $2.6 billion for the six months ended June 30, 2020 and 2019, respectively, a decrease of $1.2 billion, or 46%, due to a decrease in volume sold and in prices period over period. Our gasoline and gasoline blendstocks product margin was $66.9 million and $56.4 million for the six months ended June 30, 2020 and 2019, respectively, an increase $10.5 million, or 18%. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our product margins. In the first quarter of 2020, the COVID-19 pandemic and the price war between Saudi Arabia and Russia caused a rapid decline in prices, steepening the forward product pricing curve which negatively impacted our product margin in gasoline for the first three months of 2020.
Crude Oil. Crude oil sales and logistics revenues were $9.0 million and $28.5 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $19.5 million, or 68%, due to a decrease in prices. Our crude oil product margin was $9.2 million and ($0.8 million) for the three months ended June 30, 2020 and 2019, respectively, an increase of $10.0 million, primarily due to more favorable market conditions, including the flattening of the forward product pricing curve.
Crude oil sales and logistics revenues were $15.5 million and $42.5 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $27.0 million, or 63%, due to decreases in prices and volume sold. Our crude oil product margin was $4.7 million and ($7.0 million) for the six months ended June 30, 2020 and 2019, respectively, an increase of $11.7 million, or 167%, primarily due to more favorable market conditions and lower railcar related expenses.
Other Oils and Related Products. Sales from other oils and related products (primarily distillates and residual oil) were $0.2 billion and $0.3 billion for the three months ended June 30, 2020 and 2019, respectively, decreasing $89.4 million, or 26%, due to a decrease in prices period over period, offset by an increase in volume sold. Our product
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margin from other oils and related products was $44.5 million and $9.4 million for the three months ended June 30, 2020 and 2019, respectively, an increase of $35.1 million, or 373%, primarily due to more favorable market conditions compared to the same period in 2019, largely in distillates but also in residual oil. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our product margins in the quarter. Our product margin in distillates was positively impacted during the second quarter by colder weather. Temperatures in the second quarter were 42% colder than the second quarter of 2019 and 18% colder than normal.
Sales from other oils and related products were $0.8 billion and $1.0 billion for the six months ended June 30, 2020 and 2019, respectively, a decrease of $0.2 billion, or 20%, due to a decrease in prices period over period, offset by an increase in volume sold. Our product margin from other oils and related products was $44.7 million and $23.5 million for the six months ended June 30, 2020 and 2019, respectively, an increase of $21.2 million, or 90%. During the second quarter of 2020, there was a significant recovery in the supply/demand imbalance at the end of the first quarter. The forward product pricing curve flattened which positively impacted our product margins. In the first quarter of 2020, the COVID-19 pandemic and the price war between Saudi Arabia and Russia caused a rapid decline in prices, steepening the forward product pricing curve, which negatively impacted our product margins for the first three months of 2020.
Results for Gasoline Distribution and Station Operations Segment
Gasoline Distribution. Sales from gasoline distribution were $0.5 billion and $1.0 billion for the three months ended June 30, 2020 and 2019, respectively, decreasing $570.5 million, or 56%, due to decreases in prices and volume sold largely due to the impact of the COVID-19 pandemic. Our product margin from gasoline distribution was $96.8 million and $87.8 million for the three months ended June 30, 2020 and 2019, respectively, an increase of $9.0 million, or 10%, due to higher fuel margins (cents per gallon) which more than offset the decline in volume sold.
Sales from gasoline distribution were $1.2 billion and $1.8 billion for the six months ended June 30, 2020 and 2019, respectively, a decrease of $0.6 million, or 34%, due to decreases in prices and volume sold largely due to the impact of the COVID-19 pandemic. Our product margin from gasoline distribution was $204.0 million and $175.3 million for the six months ended June 30, 2020 and 2019, respectively, an increase of $28.7 million, or 16%, primarily due to higher fuel margins (cents per gallon) which more than offset the decline in volume sold. Our product margin for the first six months of 2020 benefitted from declining wholesale prices in the first quarter of 2020, primarily in March due to the COVID-19 pandemic and geopolitical events. Declining wholesale gasoline prices can improve our gasoline product margin, the extent of which depends on the magnitude and duration of the decline.
Station Operations. Our station operations, which include (i) convenience stores sales at our directly operated stores, (ii) rental income from gasoline stations leased to dealers or from commissioned agents and from cobranding arrangements and (iii) sale of sundries, such as car wash sales and lottery and ATM commissions, collectively generated revenues of $104.1 million and $120.5 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $16.4 million, or 14%. Our product margin from station operations was $48.8 million and $57.6 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $8.8 million, or 15%. The decreases in sales and product margin are primarily due to less activity at our convenience stores, primarily due to the impact of the COVID-19 pandemic.
Sales from our station operations were $202.7 million and $225.2 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $22.5 million, or 10%. Our product margin from station operations was $97.4 million and $108.5 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $11.1 million, or 10%. The decreases in sales and product margin are primarily due to less activity at our convenience stores, primarily due to the impact of the COVID-19 pandemic.
Results for Commercial Segment
Our commercial sales were $133.0 million and $356.8 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $223.8 million, or 63%, due to decreases in prices and volume sold. Our commercial product
margin was $3.0 million and $4.5 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $1.5 million, or 33%, primarily due to a decrease in bunkering activity.
Our commercial sales were $396.4 million and $692.4 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $296.0 million, or 43%, due to decreases in prices and volume sold. Our commercial product margin was $8.9 million and $11.0 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $2.1 million, or 19%, primarily due to a decrease in bunkering activity.
SG&A expenses were $59.0 million and $41.0 million for the three months ended June 30, 2020 and 2019, respectively, an increase of $18.0 million, or 44%, including increases of $14.8 million in accrued discretionary incentive compensation, $1.2 million in professional fees, $0.9 million in costs associated with the COVID-19 pandemic, $0.7 million in wages and benefits and $0.4 million in various other SG&A expenses.
SG&A expenses were $99.9 million and $82.1 million for the six months ended June 30, 2020 and 2019, respectively, an increase of $17.8 million, or 22%, including increases of $12.3 million in accrued discretionary incentive compensation, $2.0 million in wages and benefits, $1.0 million in costs associated with the COVID-19 pandemic, $0.8 million in advertising costs, $0.7 million in professional fees and $1.0 million in various other SG&A expenses.
Operating expenses were $76.7 million and $86.4 million for the three months ended June 30, 2020 and 2019, respectively, a decrease of $9.7 million, or 11%, including decreases of $8.2 million associated with our GDSO operations, primarily due to lower credit card fees and maintenance and repair expenses and to the sale of sites, and $1.5 million associated with our terminal operations, primarily due to lower maintenance and repair expenses.
Operating expenses were $159.3 million and $169.4 million for the six months ended June 30, 2020 and 2019, respectively, a decrease of $10.1 million, or 6%, including decreases of $8.3 million associated with our GDSO operations, primarily due to lower credit card fees and maintenance and repair expenses and to the sale of sites, and $1.8 million associated with our terminal operations, primarily due to lower maintenance and repair expenses.
Lease Exit and Termination Gain
During the six months ended June 30, 2019, we were released from certain of our remaining obligations to provide future railcar storage, freight, insurance and other services for railcars under a fleet management services agreement associated with our 2016 voluntary termination of a railcar sublease. The release of certain obligations resulted in a $0.5 million reduction of the remaining accrued incremental costs, which benefit is included in lease exit and termination gain in the accompanying statement of operations for the six months ended June 30, 2019.
Amortization Expense
Amortization expense related to intangible assets was $2.7 million and $2.9 million for the three months ended June 30, 2020 and 2019, respectively, and $5.4 million and $5.9 million for the six months ended June 30, 2020 and 2019, respectively.
Net Gain on Sale and Disposition of Assets
Net gain on sale and disposition of assets was $0.8 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively, and $0.1 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively, primarily due to the sale of GDSO sites.
Long-Lived Asset Impairment
We recognized an impairment charge relating to certain right of use assets allocated to the Wholesale segment in the amount of $1.7 million for each of the three and six months ended June 30, 2020.
Interest Expense
Interest expense was $21.1 million and $23.1 million for the three months ended June 30, 2020 and 2019, respectively, and $42.7 million and $46.0 million for the six months ended June 30, 2020 and 2019, respectively. The decreases of $2.0 million, or 9%, and $3.3 million, or 7%, for the three and six months ended June 30, 2020, respectively, were due to lower average balances on our credit facilities and lower interest rates, which more than offset the $0.7 million write-off of deferred financing fees associated with the amendment to our credit agreement in May 2020.
Income Tax (Expense) Benefit
Income tax (expense) benefit was ($3.5 million) and ($0.4 million) for the three months ended June 30, 2020 and 2019, respectively, and $2.3 million and ($0.5 million) for the six months ended June 30, 2020 and 2019, respectively, which reflects the income tax (expense) benefit from the operating results of GMG, which is a taxable entity for federal and state income tax purposes. For the six months ended June 30, 2020, the income tax benefit consists of an income tax benefit of $6.3 million (discussed below) offset by an income tax expense of ($4.0 million).
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides certain tax changes in response to the COVID-19 pandemic, including the temporary removal of certain limitations on the utilization of net operating losses, permitting the carryback of net operating losses generated in 2018, 2019 or 2020 to the five preceding taxable years, increasing the ability to deduct interest expense, deferring the employer share of social security tax payments, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As a result, we recognized a benefit of $6.3 million related to the CARES Act net operating loss carryback provisions which is included in income tax benefit in the accompanying statement of operations for the six months ended June 30, 2020. We expect to receive cash refunds totaling $15.8 million associated with the carryback of losses generated in 2018 to the 2016 and 2017 tax years, and this income tax receivable is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet as of June 30, 2020.
Net Loss Attributable to Noncontrolling Interest
In February 2013, we acquired a 60% membership interest in Basin Transload. The net loss attributable to the noncontrolling interest was $0.3 million and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $0.5 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively which represents the 40% noncontrolling ownership of the net loss reported.
Liquidity and Capital Resources
Liquidity
Our primary liquidity needs are to fund our working capital requirements, capital expenditures and distributions and to service our indebtedness. Our primary sources of liquidity are cash generated from operations, amounts available under our working capital revolving credit facility and equity and debt offerings. Please read “—Credit Agreement” for more information on our working capital revolving credit facility.
Given the uncertainty surrounding the short-term and long-term impacts of COVID-19, including the timing of an economic recovery, early in the second quarter we took certain steps to increase liquidity and create additional financial flexibility. Such steps included a 25% decrease to our quarterly distribution on our common units for the period from
January 1, 2020 to March 31, 2020. In addition, we borrowed $50.0 million under our revolving credit facility which was included in cash on our balance sheet. We also reduced planned expenses and 2020 capital spending. We amended our credit agreement to provide temporary adjustments to certain covenants. Given the stronger-than-expected performance in the second quarter, we paid down our revolving credit facility with the $50.0 million cash on hand and increased our planned 2020 capital spending. In addition, we increased our quarterly distribution on our common units for the period from April 1, 2020 to June 30, 2020. We believe that our current level of cash and borrowing capacity under our credit agreement will be sufficient to meet our liquidity needs.
Working capital was $341.9 million and $250.6 million at June 30, 2020 and December 31, 2019, respectively, an increase of $91.3 million. Changes in current assets and current liabilities increasing working capital include (i) decreases of $210.0 million in accounts payable and $107.2 million in the current portion of our working capital revolving credit facility, primarily due to lower prices, and (ii) an increase of $48.6 million in derivatives, for a total increase in working capital of $365.8 million. The increase in working capital was offset by decreases of $180.4 million in accounts receivable and $106.5 million in inventories, also primarily due to lower prices.
During 2020, we paid the following cash distributions to our common unitholders and our general partner:
Distribution Paid for the
Cash Distribution Payment Date
Total Paid
February 14, 2020
18.3 million
Fourth quarter 2019
May 15, 2020
13.5 million
First quarter 2020
In addition, on July 31, 2020, the board of directors of our general partner declared a quarterly cash distribution of $0.45875 per unit ($1.835 per unit on an annualized basis) on all of our outstanding common units for the period from April 1, 2020 through June 30, 2020 to our common unitholders of record as of the close of business on August 10, 2020. We expect to pay the total cash distribution of approximately $15.7 million on August 14, 2020.
Preferred Units
During 2020, we paid the following cash distributions to holders of the Series A Preferred Units:
February 18, 2020
1.7 million
November 15, 2019 - February 14, 2020
In addition, on July 20, 2020, the board of directors of our general partner declared a quarterly cash distribution of $0.609375 per unit ($2.4375 per unit on an annualized basis) on our Series A Preferred Units for the period from May 15, 2020 through August 14, 2020 to our preferred unitholders of record as of the opening of business on August 3, 2020. We expect to pay the total cash distribution of approximately $1.7 million on August 17, 2020.
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Contractual Obligations
We have contractual obligations that are required to be settled in cash. The amounts of our contractual obligations at June 30, 2020 were as follows (in thousands):
Payments Due by Period
Remainder of
2024 and
2021
2022
2023
Credit facility obligations (1)
27,204
250,703
146,720
424,627
Senior notes obligations (2)
24,500
49,000
338,500
512,000
973,000
Operating lease obligations (3)
45,631
87,446
57,392
42,986
116,451
349,906
Other long-term liabilities (4)
15,691
26,901
22,091
13,259
50,808
128,750
Financing obligations (5)
7,423
15,016
15,261
15,510
97,874
151,084
120,449
429,066
290,464
410,255
777,133
2,027,367
Capital Expenditures
Our operations require investments to maintain, expand, upgrade and enhance existing operations and to meet environmental and operational regulations. We categorize our capital requirements as either maintenance capital expenditures or expansion capital expenditures. Maintenance capital expenditures represent capital expenditures to repair or replace partially or fully depreciated assets to maintain the operating capacity of, or revenues generated by, existing assets and extend their useful lives. Maintenance capital expenditures also include expenditures required to maintain equipment reliability, tank and pipeline integrity and safety and to address certain environmental regulations. We anticipate that maintenance capital expenditures will be funded with cash generated by operations. We had approximately $12.8 million and $21.1 million in maintenance capital expenditures for the six months ended June 30, 2020 and 2019, respectively, which are included in capital expenditures in the accompanying consolidated statements of cash flows, of which approximately $10.9 million and $19.7 million for the six months ended June 30, 2020 and 2019, respectively, are related to our investments in our gasoline station business. Repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred.
Expansion capital expenditures include expenditures to acquire assets to grow our businesses or expand our existing facilities, such as projects that increase our operating capacity or revenues by, for example, increasing dock capacity and tankage, diversifying product availability, investing in raze and rebuilds and new-to-industry gasoline stations and convenience stores, increasing storage flexibility at various terminals and by adding terminals to our storage network. We have the ability to fund our expansion capital expenditures through cash from operations or our credit
agreement or by issuing debt securities or additional equity. We had approximately $8.9 million in expansion capital expenditures for each of the six months ended June 30, 2020 and 2019, primarily related to investments in our gasoline station business.
We currently expect maintenance capital expenditures of approximately $45.0 million to $55.0 million and expansion capital expenditures, excluding acquisitions, of approximately $30.0 million to $40.0 million in 2020, relating primarily to investments in our gasoline station business. These current estimates depend, in part, on the timing of completion of projects, availability of equipment and workforce, weather, the scope and duration of the COVID-19 pandemic and unanticipated events or opportunities requiring additional maintenance or investments.
We believe that we will have sufficient cash flow from operations, borrowing capacity under our credit agreement and the ability to issue additional equity and/or debt securities to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures. However, we are subject to business and operational risks, including uncertainties related to the extent and duration of the COVID-19 pandemic and geopolitical events, each of which could adversely affect our cash flow. A material decrease in our cash flows would likely have an adverse effect on our borrowing capacity as well as our ability to issue additional equity and/or debt securities.
Cash Flow
The following table summarizes cash flow activity (in thousands):
Operating Activities
Cash flow from operating activities generally reflects our net income, balance sheet changes arising from inventory purchasing patterns, the timing of collections on our accounts receivable, the seasonality of parts of our businesses, fluctuations in product prices, working capital requirements and general market conditions.
Net cash provided by (used in) operating activities was $162.0 million and ($33.5 million) for the six months ended June 30, 2020 and 2019, respectively, for a period-over-period increase in cash flow from operating activities of $195.5 million.
Except for net income, the primary drivers of the changes in operating activities include the following (in thousands):
Period over
Period
Change
Decrease (increase) in accounts receivable
219,470
Decrease (increase) in inventories
146,151
Decrease in accounts payable
(184,183)
(Increase) decrease in change in derivatives
(74,024)
For the six months ended June 30, 2020, the decreases in accounts receivable, inventories and accounts payable are largely due to the decrease in prices, primarily caused by the COVID-19 pandemic and geopolitical events. The increase in operating cash flow was also impacted by the year-over-year change in derivatives of $74.0 million in part due to the decrease in prices and an increase in the volume of physical forward contracts.
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For the six months ended June 30, 2019, the increases in accounts receivable and inventories were primarily due to an increase in prices. The decrease in accounts payable was due in part to carrying lower levels of inventory, partly due to the change in activity as we exited the heating season.
Investing Activities
Net cash used in investing activities was $16.8 million for the six months ended June 30, 2020 and included $12.8 million in maintenance capital expenditures, $8.9 million in expansion capital expenditures and $1.2 million in seller note issuances, offset by $6.1 million in proceeds from the sale of property and equipment. The seller note issuances represent notes we received from buyers in connection with the sale of certain of our gasoline stations.
Net cash used in investing activities was $20.6 million for the six months ended June 30, 2019 and included $21.1 million in maintenance capital expenditures, $8.9 million in expansion capital expenditures and $0.6 million in seller note issuances, offset by $10.0 million in proceeds from the sale of property and equipment.
Please read “—Capital Expenditures” for a discussion of our capital expenditures for the six months ended June 30, 2020 and 2019.
Financing Activities
Net cash used in financing activities was $146.8 million for the six months ended June 30, 2020 and included $107.2 million in net payments on our working capital revolving credit facility due to lower prices and an increase in net income, $35.0 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner, $4.7 million in net payments on our revolving credit facility, and $0.3 million in the repurchase of common units pursuant to our repurchase program for future satisfaction of our LTIP obligations. Net cash used in financing activities was offset by $0.4 million in capital contributions from our noncontrolling interest at Basin Transload.
Net cash provided by financing activities was $56.4 million for the six months ended June 30, 2019 and primarily included $102.8 million in net borrowings from our working capital revolving credit facility primarily due to the increase in inventories and accounts receivable, offset by $38.4 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner and $8.0 million in net payments on our revolving credit facility.
See Note 8 of Notes to Consolidated Financial Statement for supplemental cash flow information related to our working capital revolving credit facility and revolving credit facility.
Certain subsidiaries of ours, as borrowers, and we and certain of our subsidiaries, as guarantors, have a $1.17 billion senior secured credit facility which was amended on May 7, 2020 to, among other things, provide temporary adjustments to certain covenants and reduce the total aggregate commitment by $130.0 million from $1.3 billion (see “–Fourth Amendment to the Credit Agreement” below).
We repay amounts outstanding and reborrow funds based on our working capital requirements and, therefore, classify as a current liability the portion of the working capital revolving credit facility we expect to pay down during the course of the year. The long-term portion of the working capital revolving credit facility is the amount we expect to be outstanding during the entire year. The credit agreement matures on April 29, 2022.
There are two facilities under the credit agreement:
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Availability under the working capital revolving credit facility is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets. Availability under the borrowing base may be affected by events beyond our control, such as changes in petroleum product prices, collection cycles, counterparty performance, advance rates and limits and general economic conditions.
As of June 30, 2020, we had total borrowings outstanding under the credit agreement of $404.7 million, including $188.0 million outstanding on the revolving credit facility. In addition, we had outstanding letters of credit of $39.9 million. Subject to borrowing base limitations, the total remaining availability for borrowings and letters of credit was $725.4 million and $660.2 million at June 30, 2020 and December 31, 2019, respectively.
The credit agreement imposes financial covenants that require us to maintain certain minimum working capital amounts, a minimum combined interest coverage ratio, a maximum senior secured leverage ratio and a maximum total leverage ratio. We were in compliance with the foregoing covenants at June 30, 2020. The credit agreement also contains a representation whereby there can be no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect (as defined in the credit agreement). In addition, the credit agreement limits distributions by us to our unitholders to the amount of Available Cash (as defined in the partnership agreement).
Please read Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Agreement” in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information on the credit agreement.
On May 7, 2020, we and certain of our subsidiaries entered into the Fourth Amendment to Third Amended and Restated Credit Agreement (the “Fourth Amendment”), which further amends the credit agreement. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the credit agreement.
The Fourth Amendment amends certain terms, provisions and covenants of the credit agreement, including, without limitation:
All other material terms of the credit agreement remain substantially the same as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Agreement” in our Annual Report on Form 10-K for the year ended December 31, 2019.
We had 7.00% senior notes due 2027 and 7.00% senior notes due 2023 outstanding at March 31, 2020. Please read Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Notes” in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information on these senior notes due 2023.
On June 1, 2015, we acquired retail gasoline stations and dealer supply contracts from Capitol Petroleum Group (“Capitol”). In connection with the acquisition, we assumed a financing obligation of $89.6 million associated with two sale-leaseback transactions by Capitol for 53 leased sites that did not meet the criteria for sale accounting. During the terms of these leases, which expire in May 2028 and September 2029, in lieu of recognizing lease expense for the lease rental payments, we incur interest expense associated with the financing obligation. Interest expense of approximately $2.3 million was recorded for each of the three months ended June 30, 2020 and 2019, and $4.6 million and $4.7 million was recorded for the six months ended June 30, 2020 and 2019, respectively, which is included in interest expense in the accompanying consolidated statements of operations. The financing obligation will amortize through expiration of the leases based upon the lease rental payments which were $2.5 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively, and $5.0 million and $4.9 million for the six months ended June 30, 2020 and 2019, respectively. The financing obligation balance outstanding at June 30, 2020 was $86.6 million associated with the Capitol acquisition.
On June 29, 2016, we sold to a premier institutional real estate investor (the “Buyer”) real property assets, including the buildings, improvements and appurtenances thereto, at 30 gasoline stations and convenience stores located in Connecticut, Maine, Massachusetts, New Hampshire and Rhode Island (the “Sale-Leaseback Sites”) for a purchase price of approximately $63.5 million. In connection with the sale, we entered into a Master Unitary Lease Agreement with the Buyer to lease back the real property assets sold with respect to the Sale-Leaseback Sites (such Master Lease Agreement, together with the Sale-Leaseback Sites, the “Sale-Leaseback Transaction”).
As a result of not meeting the criteria for sale accounting for these sites, the Sale-Leaseback Transaction is accounted for as a financing arrangement. As such, the property and equipment sold and leased back by us has not been derecognized and continues to be depreciated. We recognized a corresponding financing obligation of $62.5 million equal to the $63.5 million cash proceeds received for the sale of these sites, net of $1.0 million financing fees. During the term of the lease, which expires in June 2031, in lieu of recognizing lease expense for the lease rental payments, we incur interest expense associated with the financing obligation. Lease rental payments are recognized as both interest expense and a reduction of the principal balance associated with the financing obligation. Lease rental payments are recognized as both interest expense and a reduction of the principal balance associated with the financing obligation. Interest expense was $1.1 million for each of the three months ended June 30, 2020 and 2019 and $2.2 million for each of the six months ended June 30, 2020 and 2019. Lease rental payments were $1.1 million for each of the three months ended June 30, 2020 and 2019, and $2.3 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively. The financing obligation balance outstanding at June 30, 2020 was $62.2 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these
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consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The outbreak of COVID-19 across the United States and the responses of governmental bodies (federal, state and municipal), companies and individuals, including mandated and/or voluntary restrictions to mitigate the spread of the virus, have caused a significant economic downturn. The uncertainty surrounding the short and long-term impact of COVID-19, including the inability to project the timing of an economic recovery, may have an impact on our use of estimates. Actual results may differ from these estimates under different assumptions or conditions.
These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment, and involve complex analysis: inventory, leases, revenue recognition, trustee taxes, derivative financial instruments, goodwill, evaluation of long-lived asset impairment and environmental and other liabilities.
The significant accounting policies and estimates that we have adopted and followed in the preparation of our consolidated financial statements are detailed in Note 2 of Notes to Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no subsequent changes in these policies and estimates that had a significant impact on our financial condition and results of operations for the periods covered in this report, except as described in Note 19 of Notes to Consolidated Financial Statements herein for the adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” including modifications to that standard thereafter, and now codified as ASC 326 which we adopted on January 1, 2020.
Recent Accounting Pronouncements
A description and related impact expected from the adoption of certain new accounting pronouncements is provided in Note 19 of Notes to Consolidated Financial Statements included elsewhere in this report.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are exposed are interest rate risk and commodity risk. We currently utilize various derivative instruments to manage exposure to commodity risk.
Interest Rate Risk
We utilize variable rate debt and are exposed to market risk due to the floating interest rates on our credit agreement. Therefore, from time to time, we utilize interest rate collars, swaps and caps to hedge interest obligations on specific and anticipated debt issuances.
As of June 30, 2020, we had total borrowings outstanding under our credit agreement of $404.7 million. Please read Part I, Item 2. “Management’s Discussion and Analysis—Liquidity and Capital Resources—Credit Agreement,” for information on interest rates related to our borrowings. The impact of a 1% increase in the interest rate on this amount of debt would have resulted in an increase in interest expense, and a corresponding decrease in our results of operations, of approximately $4.0 million annually, assuming, however, that our indebtedness remained constant throughout the year.
Commodity Risk
We hedge our exposure to price fluctuations with respect to refined petroleum products, renewable fuels, crude oil and gasoline blendstocks in storage and expected purchases and sales of these commodities. The derivative instruments utilized consist primarily of exchange-traded futures contracts traded on the NYMEX, CME and ICE and over-the-
counter transactions, including swap agreements entered into with established financial institutions and other credit-approved energy companies. Our policy is generally to purchase only products for which we have a market and to structure our sales contracts so that price fluctuations do not materially affect our profit. While our policies are designed to minimize market risk, as well as inherent basis risk, exposure to fluctuations in market conditions remains. Except for the controlled trading program discussed below, we do not acquire and hold futures contracts or other derivative products for the purpose of speculating on price changes that might expose us to indeterminable losses.
While we seek to maintain a position that is substantially balanced within our commodity product purchase and sales activities, we may experience net unbalanced positions for short periods of time as a result of variances in daily purchases and sales and transportation and delivery schedules as well as other logistical issues inherent in our businesses, such as weather conditions. In connection with managing these positions, we are aided by maintaining a constant presence in the marketplace. We also engage in a controlled trading program for up to an aggregate of 250,000 barrels of commodity products at any one point in time. Changes in the fair value of these derivative instruments are recognized in the consolidated statements of operations through cost of sales. In addition, because a portion of our crude oil business may be conducted in Canadian dollars, we may use foreign currency derivatives to minimize the risks of unfavorable exchange rates. These instruments may include foreign currency exchange contracts and forwards. In conjunction with entering into the commodity derivative, we may enter into a foreign currency derivative to hedge the resulting foreign currency risk. These foreign currency derivatives are generally short-term in nature and not designated for hedge accounting.
We utilize exchange-traded futures contracts and other derivative instruments to minimize or hedge the impact of commodity price changes on our inventories, fuel purchases and forward fixed price commitments. Any hedge ineffectiveness is reflected in our results of operations. We utilize regulated exchanges, including the NYMEX, CME and ICE, which are exchanges for the respective commodities that each trades, thereby reducing potential delivery and supply risks. Generally, our practice is to close all exchange positions rather than to make or receive physical deliveries.
At June 30, 2020, the fair value of all of our commodity risk derivative instruments and the change in fair value that would be expected from a 10% price increase or decrease are shown in the table below (in thousands):
Fair Value at
Gain (Loss)
Effect of 10%
Price Increase
Price Decrease
Exchange traded derivative contracts
(15,902)
15,902
Forward derivative contracts
40,482
(8,390)
8,390
34,187
(24,292)
24,292
The fair values of the futures contracts are based on quoted market prices obtained from the NYMEX, CME and ICE. The fair value of the swaps and option contracts are estimated based on quoted prices from various sources such as independent reporting services, industry publications and brokers. These quotes are compared to the contract price of the swap, which approximates the gain or loss that would have been realized if the contracts had been closed out at June 30, 2020. For positions where independent quotations are not available, an estimate is provided, or the prevailing market price at which the positions could be liquidated is used. All hedge positions offset physical exposures to the physical market; none of these offsetting physical exposures are included in the above table. Price-risk sensitivities were calculated by assuming an across-the-board 10% increase or decrease in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. In the event of an actual 10% change in prompt month prices, the fair value of our derivative portfolio would typically change less than that shown in the table due to lower volatility in out-month prices. We have a daily margin requirement to maintain a cash deposit with our brokers based on the prior day’s market results on open futures contracts. The balance of this deposit will fluctuate based on our open market positions and the commodity exchange’s requirements. The brokerage margin balance was $32.3 million at June 30, 2020.
We are exposed to credit loss in the event of nonperformance by counterparties to our exchange-traded derivative contracts, physical forward contracts, and swap agreements. We anticipate some nonperformance by some of these counterparties which, in the aggregate, we do not believe at this time will have a material adverse effect on our financial condition, results of operations or cash available for distribution to our unitholders. Exchange-traded derivative
contracts, the primary derivative instrument utilized by us, are traded on regulated exchanges, greatly reducing potential credit risks. We utilize major financial institutions as our clearing brokers for all NYMEX, CME and ICE derivative transactions and the right of offset exists with these financial institutions. Accordingly, the fair value of our exchange-traded derivative instruments is presented on a net basis in the consolidated balance sheet. Exposure on physical forward contracts and swap agreements is limited to the amount of the recorded fair value as of the balance sheet dates.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our principal executive officer and principal financial officer, management evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were operating and effective as of June 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1.Legal Proceedings
The information required by this item is included in Note 18 of Notes to Consolidated Financial Statements and is incorporated herein by reference.
Item 1A.Risk Factors
In addition to other information set forth in this report, you should carefully consider the factors discussed below and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results.
The outbreak of COVID-19 and certain developments in global oil markets have had, and may continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition and results of operation and those of our customers, suppliers and other counterparties.
The outbreak of COVID-19 across the United States and the responses of governmental bodies (federal, state and municipal), companies and individuals, including mandated and/or voluntary restrictions to mitigate the spread of the virus, have caused a significant economic downturn. Because there are fewer people commuting to and from work and elsewhere, fewer people traveling as a result of “stay-at-home” or similar-like directives, fewer people on the road to purchase goods or services, and fewer companies engaged in their traditional business activities who would otherwise seek such goods and/or services, there has been a decline in the demand for the products we sell and the services we provide. These declines are further impacted by world-wide events related to production of crude oil and the related steep decline in the pricing of that product.
There is continuing uncertainty surrounding the short-term and long-term impacts of COVID-19 to the national and state economies. The inability to project a timely economic recovery and/or the extent of same on each of a national, state and regional basis remain prevalent. Any prolonged period of economic distress and/or prolonged and disparate periods of economic recovery have had and could continue to have an adverse effect on our financial condition, results of operation and cash available for distribution to our unitholders. These events could also have or cause significant adverse effects on the financial condition of our counterparties, suppliers of goods and services we purchase, and purchasers of customers of the goods and services we sell, resulting in disruption to and a decline in our business activities resulting in an adverse impact to our financial condition and results of operations.
Any of the foregoing events or conditions, or other unforeseen consequences of COVID-19 and certain developments in global oil markets, could significantly adversely affect our business and financial condition and the business and financial condition of our customers, suppliers and counterparties. The ultimate extent of the impact of COVID-19 on our business, financial condition and results of operations depends in large part on future developments which are uncertain and cannot be predicted with any certainty at this time. That uncertainty includes the duration of the COVID-19 pandemic, the geographic regions so impacted, the extent of such impact within specific boundaries of those areas and the impact to the local, state and national economies.
To the extent COVID-19 and certain developments in global oil markets adversely affect our business activities, financial condition and results of operations, the COVID-19 pandemic and such developments in global oil markets may also have the effect of heightening many of the other risk factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 6.Exhibits
3.1
Certificate of Limited Partnership of Global Partners LP (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on May 10, 2005).
3.2
Fourth Amended and Restated Agreement of Limited Partnership of Global Partners LP dated as of August 7, 2018 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 7, 2018).
4.1
Indenture, dated as of June 4, 2015, among the Issuers, the Guarantors, and Deutsche Bank Trust Company Americas, as trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on June 4, 2015).
4.2
Indenture, dated July 31, 2019, among the Issuers, the Guarantors and Deutsche Bank Trust Company Americas, as trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on July 31, 2019).
10.1
Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of May 7, 2020 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 8, 2020).
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.
101.INS*
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
† Not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
Global GP LLC,
its general partner
Dated: August 6, 2020
/s/ Eric Slifka
Eric Slifka
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Daphne H. Foster
Daphne H. Foster
Chief Financial Officer
(Principal Financial Officer)