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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(
(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 | ||
Perpetual Preferred Units representing limited partner interests | ||||
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.
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.
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.
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
The issuer had
TABLE OF CONTENTS
Item 1.Financial Statements
GLOBAL PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
(Unaudited)
June 30, | December 31, |
| |||||
| 2022 |
| 2021 |
| |||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net | | | |||||
Accounts receivable—affiliates |
| |
| | |||
Inventories |
| |
| | |||
Brokerage margin deposits |
| |
| | |||
Derivative assets |
| |
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Prepaid expenses and other current assets |
| |
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Total current assets |
| |
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Property and equipment, net |
| |
| | |||
Right of use assets, net | | | |||||
Intangible assets, net |
| |
| | |||
Goodwill |
| |
| | |||
Other assets |
| |
| | |||
Total assets | $ | | $ | | |||
Liabilities and partners’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Working capital revolving credit facility—current portion |
| |
| | |||
Lease liability—current portion | | | |||||
Environmental liabilities—current portion |
| |
| | |||
Trustee taxes payable |
| |
| | |||
Accrued expenses and other current liabilities |
| |
| | |||
Derivative liabilities |
| |
| | |||
Total current liabilities |
| |
| | |||
Working capital revolving credit facility—less current portion |
| — |
| | |||
Revolving credit facility |
| |
| | |||
Senior notes |
| |
| | |||
Long-term lease liability—less current portion | | | |||||
Environmental liabilities—less current portion |
| |
| | |||
Financing obligations | | | |||||
Deferred tax liabilities | | | |||||
Other long—term liabilities |
| |
| | |||
Total liabilities |
| |
| | |||
Partners’ equity | |||||||
Series A preferred limited partners ( | | | |||||
Series B preferred limited partners ( | | | |||||
Common limited partners ( |
| |
| | |||
General partner interest ( |
| ( |
| ( | |||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Total partners’ equity |
| |
| | |||
Total liabilities and partners’ equity | $ | | $ | | |||
The accompanying notes are an integral part of these consolidated financial statements.
3
GLOBAL PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
Three Months Ended |
| Six Months Ended |
| ||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Sales | $ | | $ | | $ | | $ | | |||||
Cost of sales |
| |
| |
| |
| | |||||
Gross profit |
| |
| |
| |
| | |||||
Costs and operating expenses: | |||||||||||||
Selling, general and administrative expenses |
| |
| |
| |
| | |||||
Operating expenses |
| |
| |
| |
| | |||||
Amortization expense |
| |
| |
| |
| | |||||
Net gain on sale and disposition of assets | ( | ( | ( | ( | |||||||||
Long-lived asset impairment | — | | — | | |||||||||
Total costs and operating expenses |
| |
| |
| |
| | |||||
Operating income |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Income before income tax expense |
| |
| |
| |
| | |||||
Income tax expense |
| ( |
| ( |
| ( |
| ( | |||||
Net income |
| |
| |
| |
| | |||||
Less: General partner’s interest in net income, including incentive distribution rights |
| |
| |
| |
| | |||||
Less: Preferred limited partner interest in net income | | | | | |||||||||
Net income attributable to common limited partners | $ | | $ | | $ | | $ | | |||||
Basic net income per common limited partner unit | $ | | $ | | $ | | $ | | |||||
Diluted net income per common limited partner unit | $ | | $ | | $ | | $ | | |||||
Basic weighted average common limited partner units outstanding | |
| |
| |
| | ||||||
Diluted weighted average common limited partner units outstanding |
| |
| |
| |
| | |||||
The accompanying notes are an integral part of these consolidated financial statements.
4
GLOBAL PARTNERS LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended | Six Months Ended |
| |||||||||||
June 30, | June 30, | ||||||||||||
2022 |
| 2021 |
| 2022 | 2021 |
| |||||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive (loss) income: | |||||||||||||
Change in fair value of cash flow hedges |
| — |
| ( |
| — |
| | |||||
Change in pension liability |
| ( |
| |
| ( |
| | |||||
Total other comprehensive (loss) income |
| ( |
| |
| ( |
| | |||||
Comprehensive income | $ | | $ | | $ | | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
5
GLOBAL PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended | |||||||
June 30, |
| ||||||
| 2022 |
| 2021 |
| |||
Cash flows from operating activities | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | | | |||||
Amortization of deferred financing fees |
| | | ||||
Bad debt expense |
| ( | ( | ||||
Unit-based compensation expense |
| | | ||||
Write-off of financing fees | — | | |||||
Net gain on sale and disposition of assets |
| ( | ( | ||||
Long-lived asset impairment |
| — | | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable |
| ( | ( | ||||
Accounts receivable-affiliate |
| ( | | ||||
Inventories |
| | ( | ||||
Broker margin deposits |
| ( | ( | ||||
Prepaid expenses, all other current assets and other assets |
| | | ||||
Accounts payable |
| | | ||||
Trustee taxes payable |
| ( | | ||||
Change in derivatives |
| | | ||||
Accrued expenses, all other current liabilities and other long-term liabilities |
| ( | ( | ||||
Net cash provided by (used in) operating activities |
| |
| ( | |||
Cash flows from investing activities | |||||||
Acquisitions |
| ( |
| ( | |||
Capital expenditures |
| ( | ( | ||||
Seller note issuances | — | ( | |||||
Proceeds from sale of property and equipment, net |
| | | ||||
Net cash used in investing activities |
| ( |
| ( | |||
Cash flows from financing activities | |||||||
Net proceeds from issuance of Series B preferred units | — | | |||||
Net (payments on) borrowings from working capital revolving credit facility | ( | | |||||
Net borrowings from (payments on) revolving credit facility |
| | ( | ||||
Repurchase of common units | ( | ( | |||||
LTIP units withheld for tax obligations |
| ( | ( | ||||
Distributions to limited partners and general partner |
| ( | ( | ||||
Net cash (used in) provided by financing activities |
| ( |
| | |||
Cash and cash equivalents | |||||||
Decrease in cash and cash equivalents |
| ( |
| ( | |||
Cash and cash equivalents at beginning of period |
| |
| | |||
Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental information | |||||||
Cash paid during the period for interest |
| $ | |
| $ | | |
The accompanying notes are an integral part of these consolidated financial statements.
6
GLOBAL PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
(In thousands)
(Unaudited)
Series A | Series B | Accumulated | |||||||||||||||||
Preferred | Preferred | Common | General | Other | Total | ||||||||||||||
Limited | Limited | Limited | Partner | Comprehensive | Partners’ |
| |||||||||||||
Three and six months ended June 30, 2022 |
| Partners | Partners | Partners |
| Interest |
| Income (Loss) |
| Equity |
| ||||||||
Balance at December 31, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Net income |
| |
| |
| |
| |
| — |
| | |||||||
Distributions to limited partners and general partner | ( | ( |
| ( |
| ( |
| — | ( | ||||||||||
Unit-based compensation | — | — |
| |
| — |
| — | | ||||||||||
Other comprehensive income | — | — |
| — |
| — |
| ( | ( | ||||||||||
LTIP units withheld for tax obligations | — | — |
| ( |
| — |
| — | ( | ||||||||||
Dividends on repurchased units | — | — |
| |
| — |
| — | | ||||||||||
Balance at March 31, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Net income |
| |
| |
| |
| |
| — |
| | |||||||
Distributions to limited partners and general partner | ( | ( |
| ( |
| ( |
| — | ( | ||||||||||
Unit-based compensation | — | — |
| |
| — |
| — | | ||||||||||
Other comprehensive loss | — | — |
| — |
| — |
| ( | ( | ||||||||||
Repurchase of common units | — | — | ( | — | — | ( | |||||||||||||
Distribution equivalent rights | — | — | ( | — | — | ( | |||||||||||||
Dividends on repurchased units | — | — |
| |
| — |
| — | | ||||||||||
Balance at June 30, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Series A | Series B | Accumulated | |||||||||||||||||
Preferred | Preferred | Common | General | Other | Total | ||||||||||||||
Limited | Limited | Limited | Partner | Comprehensive | Partners’ |
| |||||||||||||
Three and six months ended June 30, 2021 |
| Partners | Partners | Partners |
| Interest |
| Income (Loss) |
| Equity |
| ||||||||
Balance at December 31, 2020 | $ | | $ | — | $ | | $ | ( | $ | | $ | | |||||||
Issuance of Series B preferred units | — | | — | — | — | | |||||||||||||
Net income (loss) |
| |
| |
| ( |
| |
| — |
| ( | |||||||
Distributions to limited partners and general partner | ( | — |
| ( |
| ( |
| — | ( | ||||||||||
Unit-based compensation | — | — |
| |
| — |
| — | | ||||||||||
Other comprehensive income | — | — |
| — |
| — |
| | | ||||||||||
LTIP units withheld for tax obligations | — | — |
| ( |
| — |
| — | ( | ||||||||||
Dividends on repurchased units | — | — |
| |
| — |
| — | | ||||||||||
Balance at March 31, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | |||||||
Net income |
| |
| |
| |
| |
| — |
| | |||||||
Distributions to limited partners and general partner |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||||
Unit-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| |
| | |||||||
Repurchase of common units | — | — | ( | — | — | ( | |||||||||||||
LTIP units withheld for tax obligations |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Dividends on repurchased units | — | — |
| |
| — |
| — | | ||||||||||
Balance at June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
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, 2022, the Partnership had a portfolio of
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
COVID-19
Although the impact of COVID-19 has declined to date, it continues to make its presence felt in the Partnership’s corporate offices, at its retail sites and terminal locations and in the global supply chain. The Partnership continues to monitor these impacts while providing essential products and services, prioritizing the safety of the Partnership’s employees, customers and vendors in the communities where it operates.
2022 Events
Sale of the Revere Terminal—On June 28, 2022, the Partnership completed the sale of its terminal located on Boston Harbor in Revere, Massachusetts (the “Revere Terminal”) to Revere MA Owner LLC (the “Revere Buyer”) for a purchase price of $
Pursuant to the terms of the purchase agreement the Partnership entered into with affiliates of the Slifka family (the “Initial Sellers”), related parties, in 2015 to acquire the Revere Terminal, the Initial Sellers are entitled to an amount equal to of the net proceeds (as defined in the 2015 purchase agreement) (the “Initial Sellers Share”) from the sale of the Revere Terminal. At the time of the 2022 closing, the preliminary calculation of the Initial Sellers Share was approximately $
8
current government storage contract at the Revere Terminal and potential operating losses or profits relating to the operation of the Revere Terminal during the initial leaseback term, will occur upon the expiration of such storage contract. After closing costs and the preliminary payment of the Initial Sellers Share, the Partnership received net proceeds of approximately $
In connection with the sale of the Revere Terminal, the Partnership recognized a net gain of approximately $
Amendments to the Credit Agreement—On March 9, 2022, the Partnership and certain of its subsidiaries entered into the sixth amendment to third amended and restated credit agreement which, among other things, increased the total aggregate commitment to $
Acquisitions—On February 1, 2022, the Partnership acquired substantially all of the retail motor fuel assets from Miller Oil Co., Inc. (“Miller Oil”). See Note 2.
On January 25, 2022, the Partnership acquired substantially all of the assets from Connecticut-based Consumers Petroleum of Connecticut, Incorporated (“Consumers Petroleum”). See Note 2.
Basis of Presentation
The financial results of Miller Oil and Consumers Petroleum since the respective acquisition date are included in the accompanying statements of operations for the three and six months ended June 30, 2022. The accompanying consolidated financial statements as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 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, 2021 and notes thereto contained in the Partnership’s Annual Report on Form 10-K. The significant accounting policies described in Note 2, “Summary of Significant Accounting Policies,” of such Annual Report on Form 10-K are the same used in preparing the accompanying consolidated financial statements.
The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2022. The consolidated balance sheet at December 31, 2021 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, 2021.
9
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 months. 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, COVID-19 has had a negative impact on gasoline demand and the extent and duration of that impact remains 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.
The following table presents the Partnership’s product sales and other revenues as a percentage of the consolidated sales for the periods presented:
Three Months Ended | Six Months Ended | ||||||||
June 30, | June 30, | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |
Gasoline sales: gasoline and gasoline blendstocks (such as ethanol) |
| | % | | % | | % | | % |
Distillates (home heating oil, diesel and kerosene) and residual oil sales |
| | % | | % | | % | | % |
Crude oil sales and crude oil logistics revenue |
| — | % | | % | — | % | | % |
Convenience store and prepared food sales, rental income and sundries | | % | | % | | % | | % | |
Total |
| | % | | % | | % | | % |
The following table presents the Partnership’s product margin by segment as a percentage of the consolidated product margin for the periods presented:
Three Months Ended | Six Months Ended | ||||||||
June 30, | June 30, | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |
Wholesale segment |
| | % | | % | | % | | % |
Gasoline Distribution and Station Operations segment |
| | % | | % | | % | | % |
Commercial segment | | % | | % | | % | | % | |
Total |
| | % | | % | | % | | % |
See Note 13, “Segment Reporting,” for additional information on the Partnership’s operating segments.
Note 2. Business Combinations
Acquisition from Miller Oil Co., Inc.—On February 1, 2022, the Partnership acquired substantially all of the retail motor fuel assets from Miller Oil in a cash transaction. The acquisition includes
10
The preliminary fair values of the assets acquired and liabilities assumed as of February 1, 2022, the acquisition date, are set forth in the table below. The excess of the purchase price over the aggregate acquisition date value of identifiable net assets acquired was recorded as goodwill and assigned to the GDSO segment. Substantially all of the goodwill is expected to be deductible for tax purposes. These preliminary acquisition date values were generally determined through established and generally accepted valuation techniques and are subject to change during the measurement period as valuations are finalized. As a result, the acquisition accounting is not complete, and additional information that existed at the acquisition date may become known to the Partnership during the remainder of the measurement period. As of the filing date of this Form 10-Q, the Partnership is still in the process of valuing the assets acquired from Miller Oil, including inventory, property and equipment, right of use assets, intangible assets and liabilities.
The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Assets purchased: |
| ||
Inventory | $ | | |
Property and equipment | | ||
Right of use assets | | ||
Intangibles | | ||
Deferred tax asset | | ||
Other assets | | ||
Total identifiable assets purchased | | ||
Liabilities assumed: | |||
Accrued expenses and other current liabilities | ( | ||
Environmental liabilities | ( | ||
Lease liability | ( | ||
Other non-current liabilities | ( | ||
Total liabilities assumed | ( | ||
Net identifiable assets acquired | | ||
Goodwill | | ||
Net assets acquired |
| $ | |
During the three months ended June 30, 2022, the Partnership recorded the following changes to the preliminary purchase accounting, which resulted in an increase in goodwill to $
Goodwill – March 31, 2022 | $ | | ||
Decrease in purchase price | ( | |||
Decrease in inventory | | |||
Deferred tax asset | ( | |||
Other assets | ( | |||
Increase in accrued expenses and other current liabilities | | |||
Increase in other non-current liabilities | | |||
Goodwill – June 30, 2022 | $ | |
The fair values of the remaining assets and liabilities noted above approximate their carrying values at February 1, 2022, the acquisition date.
The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include, in part, a review of the expected
11
use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset. The Partnership amortizes these intangible assets over their estimated useful lives which is consistent with the estimated undiscounted future cash flows of these assets.
As part of the purchase price allocation, identifiable intangible assets include dealer supply contracts that are being amortized over to
In connection with the acquisition of Miller Oil, the Partnership incurred acquisition costs of approximately $
Acquisition from Consumers Petroleum of Connecticut Incorporated—On January 25, 2022, the Partnership acquired substantially all of the assets from Consumers Petroleum in a cash transaction. The acquisition includes
The preliminary fair values of the assets acquired and liabilities assumed as of January 25, 2022, the acquisition date, are set forth in the table below. The excess of the purchase price over the aggregate acquisition date value of identifiable net assets acquired was recorded as goodwill and assigned to the GDSO segment. Substantially all of the goodwill is expected to be deductible for tax purposes. These preliminary acquisition date values were generally determined through established and generally accepted valuation techniques and are subject to change during the measurement period as valuations are finalized. As a result, the acquisition accounting is not complete, and additional information that existed at the acquisition date may become known to the Partnership during the remainder of the measurement period. As of the filing date of this Form 10-Q, the Partnership is still in the process of valuing the assets acquired from Consumers Petroleum, including inventory, property and equipment, right of use assets, intangible assets and liabilities.
12
The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Assets purchased: |
| ||
Inventory | $ | | |
Property and equipment | | ||
Right of use assets | | ||
Intangibles | | ||
Other non-current assets | | ||
Total identifiable assets purchased | | ||
Liabilities assumed: | |||
Accrued expenses and other current liabilities | ( | ||
Environmental liabilities | ( | ||
Lease liability | ( | ||
Other non-current liabilities | ( | ||
Total liabilities assumed | ( | ||
Net identifiable assets acquired | | ||
Goodwill | | ||
Net assets acquired | $ | |
During the three months ended June 30, 2022, the Partnership recorded the following changes to the preliminary purchase accounting, which resulted in an increase in goodwill to $
Goodwill – March 31, 2022 |
| $ | | |
Decrease in property and equipment | | |||
Increase in other non-current assets | ( | |||
Accrued expenses and other current liabilities | | |||
Decrease in environmental liabilities | ( | |||
Increase in other non-current liabilities | | |||
Goodwill – June 30, 2022 |
| $ | |
The fair values of the remaining assets and liabilities noted above approximate their carrying values at January 25, 2022, the acquisition date.
The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include, in part, a review of the expected use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset. The Partnership amortizes these intangible assets over their estimated useful lives which is consistent with the estimated undiscounted future cash flows of these assets.
As part of the purchase price allocation, identifiable intangible assets include dealer supply contracts that are being amortized over to
In connection with the acquisition of Consumers Petroleum, the Partnership incurred acquisition costs of approximately $
13
Supplemental Pro Forma Information—Revenues and net income not included in the Partnership’s consolidated operating results for Miller Oil and Consumers Petroleum from January 1, 2022 through the respective acquisition date were immaterial
Note 3. 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, 2022 |
| ||||||||||||
Revenue from contracts with customers: |
| Wholesale |
| GDSO |
| Commercial |
| Total |
| ||||
Refined petroleum products, renewable fuels and crude oil | $ | | $ | | $ | | $ | | |||||
Station operations |
| — |
| |
| — |
| | |||||
Total revenue from contracts with customers | | | | | |||||||||
Other sales: | |||||||||||||
Revenue originating as physical forward contracts and exchanges | | — | | | |||||||||
Revenue from leases |
| |
| |
| — |
| | |||||
Total other sales | | | | | |||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
Three Months Ended June 30, 2021 |
| ||||||||||||
Revenue from contracts with customers: |
| Wholesale |
| GDSO |
| Commercial |
| Total |
| ||||
Refined petroleum products, renewable fuels and crude oil | $ | | $ | | $ | | $ | | |||||
Station operations |
| — |
| |
| — |
| | |||||
Total revenue from contracts with customers | | | | | |||||||||
Other sales: | |||||||||||||
Revenue originating as physical forward contracts and exchanges | | — | | | |||||||||
Revenue from leases |
| |
| |
| — |
| | |||||
Total other sales | | | | | |||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
Six Months Ended June 30, 2022 |
| ||||||||||||
Revenue from contracts with customers: |
| Wholesale |
| GDSO |
| Commercial |
| Total |
| ||||
Refined petroleum products, renewable fuels and crude oil | $ | | $ | | $ | | $ | | |||||
Station operations |
| — |
| |
| — |
| | |||||
Total revenue from contracts with customers | | | | | |||||||||
Other sales: | |||||||||||||
Revenue originating as physical forward contracts and exchanges | | — | | | |||||||||
Revenue from leases |
| |
| |
| — |
| | |||||
Total other sales | | | | | |||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
14
Six Months Ended June 30, 2021 |
| ||||||||||||
Revenue from contracts with customers: |
| Wholesale |
| GDSO |
| Commercial |
| Total |
| ||||
Refined petroleum products, renewable fuels and crude oil | $ | | $ | | $ | | $ | | |||||
Station operations |
| — |
| |
| — |
| | |||||
Total revenue from contracts with customers | | | | | |||||||||
Other sales: | |||||||||||||
Revenue originating as physical forward contracts and exchanges | | — | | | |||||||||
Revenue from leases |
| |
| |
| — |
| | |||||
Total other sales | | | | | |||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
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
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, 2022 and December 31, 2021.
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 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.
15
Inventories consisted of the following (in thousands):
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
Distillates: home heating oil, diesel and kerosene | $ | | $ | | |||
Gasoline |
| |
| | |||
Gasoline blendstocks |
| |
| | |||
Crude oil |
| |
| | |||
Residual oil |
| |
| | |||
Renewable identification numbers (RINs) |
| |
| | |||
Convenience store inventory |
| |
| | |||
Total | $ | | $ | | |||
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 $
Note 5. Goodwill
The following table presents changes in goodwill, all of which has been allocated to the Gasoline Distribution and Station Operations (“GDSO”) segment (in thousands):
Balance at December 31, 2021 | $ | | ||
Acquisition of Miller Oil (1) | | |||
Acquisition of Consumers Petroleum (1) | | |||
Dispositions (2) | ( | |||
Balance at June 30, 2022 | $ | |
| (1) | See Note 2 for information on the Partnership’s business combinations. |
| (2) | Dispositions represent derecognition of goodwill associated with the sale and disposition of certain assets. |
Note 6. Property and Equipment
Property and equipment consisted of the following (in thousands):
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
Buildings and improvements | $ | | $ | | |||
Land |
| |
| | |||
Fixtures and equipment |
| |
| | |||
Idle plant assets | | | |||||
Construction in process |
| |
| | |||
Capitalized internal use software |
| |
| | |||
Total property and equipment |
| |
| | |||
Less accumulated depreciation |
| |
| | |||
Total | $ | | $ | | |||
16
Property and equipment includes retail gasoline station assets held for sale of $
At June 30, 2022, the Partnership had a $
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.
Note 7. 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 $
On March 9, 2022, the Partnership and certain of its subsidiaries entered into a sixth amendment to the Credit Agreement (the “Sixth Amendment”) which, among other things, amended certain terms and provisions of the Credit Agreement to provide for $
There are
| ● | a working capital revolving credit facility to be used for working capital purposes and letters of credit in the principal amount equal to the lesser of the Partnership’s borrowing base and $ |
| ● | a $ |
In addition, the Credit Agreement has an accordion feature whereby the Partnership may request on the same terms and conditions then applicable to the Credit Agreement, provided no Event of Default (as defined in the Credit Agreement) then exists, an increase to the working capital revolving credit facility, the revolving credit facility, or both, by up to another $
17
lending group will agree to fund any request by the Partnership for additional amounts in excess of the total available commitments of $
In addition, the Credit Agreement includes a swing line pursuant to which Bank of America, N.A., as the swing line lender, may make swing line loans in U.S. dollars in an aggregate amount equal to the lesser of (a) $
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.
Borrowings under the working capital revolving credit facility bear interest at (1) the Daily or Term SOFR plus a
The average interest rates for the Credit Agreement were
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 throughout the next twelve months 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, 2022 the Partnership estimated working capital revolving credit facility borrowings will equal or exceed $
The table below presents the total borrowings and availability under the Credit Agreement (in millions):
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
Total available commitments | $ | | $ | | |||
Working capital revolving credit facility—current portion | | | |||||
Working capital revolving credit facility—less current portion | — | | |||||
Revolving credit facility | | | |||||
Total borrowings outstanding | | | |||||
Less outstanding letters of credit | | | |||||
Total remaining availability for borrowings and letters of credit (1) | $ | | $ | | |||
| (1) | Subject to borrowing base limitations. |
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, 2022.
18
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, 2021 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 Sixth Amendment and Seventh Amendment, the Partnership capitalized additional financing fees of $
Unamortized fees related to the Credit Agreement are included in other current assets and other long-term assets and amounted to $
Amortization expense of approximately $
Supplemental cash flow information
The following table presents supplemental cash flow information related to the Credit Agreement for the periods presented (in thousands):
Six Months Ended | |||||||
June 30, | |||||||
2022 |
| 2021 |
| ||||
Borrowings from working capital revolving credit facility | $ | | $ | | |||
Payments on working capital revolving credit facility | ( | ( | |||||
Net (payments on) borrowings from working capital revolving credit facility | $ | ( | $ | | |||
Borrowings from revolving credit facility | $ | | $ | — | |||
Payments on revolving credit facility | ( | ( | |||||
Net borrowings from (payments on) revolving credit facility | $ | | $ | ( | |||
Senior Notes
The Partnership had
Financing Obligations
The Partnership had financing obligations outstanding at June 30, 2022 and December 31, 2021 associated with historical sale-leaseback transactions that did not meet the criteria for sale accounting. 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, 2021 for additional information on these financial obligations.
19
Note 8. 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 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.
The following table summarizes the notional values related to the Partnership’s derivative instruments outstanding at June 30, 2022:
Units (1) |
| Unit of Measure |
| ||
Exchange-Traded Derivatives | |||||
Long | |
| Thousands of barrels | ||
Short | ( |
| Thousands of barrels | ||
OTC Derivatives (Petroleum/Ethanol) | |||||
Long | |
| Thousands of barrels | ||
Short | ( |
| Thousands of barrels | ||
| (1) | Number of open positions and gross notional values do not measure the Partnership’s risk of loss, quantify risk or represent assets or liabilities of the Partnership, but rather indicate the relative size of the derivative instruments and are used in the calculation of the amounts to be exchanged between counterparties upon settlements. |
Derivatives Accounted for as Hedges
Fair Value Hedges
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) | Three Months Ended | Six Months Ended |
| ||||||||||||
Recognized in Income on | June 30, | June 30, |
| ||||||||||||
Derivatives | 2022 | 2021 | 2022 | 2021 |
| ||||||||||
Derivatives in fair value hedging relationship |
|
|
|
|
|
|
|
|
| ||||||
Exchange-traded futures contracts and OTC derivative contracts for petroleum commodity products |
| Cost of sales | $ | | $ | ( | $ | ( | $ | ( | |||||
Hedged items in fair value hedge relationship | |||||||||||||||
Physical inventory |
| Cost of sales | $ | | $ | | $ | | $ | | |||||
20
Cash Flow Hedges
In 2020, to hedge the Partnership’s cash flow risk relative to certain trends and the fluctuations in commodity prices observed within the GDSO segment, the Partnership entered into exchange-traded commodity swap contracts and 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. All exchange traded commodity swap contracts expired on December 31, 2021; therefore, the amount of income recognized in other comprehensive income as of June 30, 2022 and expected to be reclassified into earnings within the next 12 months was $
The amount of income recognized in other comprehensive income for derivatives designated in cash flow hedging relationships was $
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.
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):
Statement of Gain (Loss) | Three Months Ended | Six Months Ended | |||||||||||||
Derivatives not designated as | Recognized in | June 30, | June 30, | ||||||||||||
hedging instruments |
| Income on Derivatives |
| 2022 |
| 2021 |
| 2022 | 2021 |
| |||||
Commodity contracts |
| Cost of sales | $ | | $ | ( | $ | | $ | | |||||
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.
21
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, 2022 and December 31, 2021 (in thousands):
June 30, 2022 |
| |||||||||||
Derivatives | Derivatives Not |
| ||||||||||
Designated as | Designated as |
| ||||||||||
Hedging | Hedging |
| ||||||||||
Balance Sheet Location | Instruments | Instruments | Total |
| ||||||||
Asset Derivatives: |
|
|
|
|
|
|
|
| ||||
Exchange-traded derivative contracts |
| Broker margin deposits | $ | | $ | | $ | | ||||
Forward derivative contracts (1) |
| Derivative assets | — | | | |||||||
Total asset derivatives | $ | | $ | | $ | | ||||||
Liability Derivatives: |
| |||||||||||
Exchange-traded derivative contracts |
| Broker margin deposits | $ | — | $ | ( | $ | ( | ||||
Forward derivative contracts (1) | Derivative liabilities | — | ( | ( | ||||||||
Total liability derivatives | $ | — | $ | ( | $ | ( | ||||||
December 31, 2021 |
| |||||||||||
Derivatives | Derivatives Not |
| ||||||||||
Designated as | Designated as |
| ||||||||||
Hedging | Hedging |
| ||||||||||
Balance Sheet Location | Instruments | Instruments | Total |
| ||||||||
Asset Derivatives: |
|
|
|
|
|
|
|
| ||||
Exchange-traded derivative contracts |
| Broker margin deposits | $ | | $ | | $ | | ||||
Forward derivative contracts (1) |
| Derivative assets | — | | | |||||||
Total asset derivatives | $ | | $ | | $ | | ||||||
Liability Derivatives: |
| |||||||||||
Exchange-traded derivative contracts | Broker margin deposits | $ | ( | $ | ( | $ | ( | |||||
Forward derivative contracts (1) |
| Derivative liabilities | — | ( | ( | |||||||
Total liability derivatives | $ | ( | $ | ( | $ | ( | ||||||
| (1) | Forward derivative contracts include the Partnership’s petroleum and ethanol physical and financial forwards and OTC swaps. |
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.
Please read Note 2 of Notes to Consolidated Financial Statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 for additional information on derivative financial instruments.
22
Note 9. 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, 2022 and December 31, 2021 (in thousands):
Fair Value at June 30, 2022 |
| ||||||||||||
Cash Collateral |
| ||||||||||||
| Level 1 |
| Level 2 |
| Netting |
| Total |
| |||||
Assets: | |||||||||||||
Forward derivative contracts (1) | $ | — | $ | | $ | — | $ | | |||||
Exchange-traded/cleared derivative instruments (2) |
| |
| — |
| ( |
| | |||||
Pension plans |
| |
| — |
| — |
| | |||||
Total assets | $ | | $ | | $ | ( | $ | | |||||
Liabilities: | |||||||||||||
Forward derivative contracts (1) | $ | — | $ | ( | $ | — | $ | ( | |||||
Fair Value at December 31, 2021 |
| ||||||||||||
Cash Collateral |
| ||||||||||||
| Level 1 |
| Level 2 |
| Netting |
| Total |
| |||||
Assets: | |||||||||||||
Forward derivative contracts (1) | $ | — | $ | | $ | — | $ | | |||||
Exchange-traded/cleared derivative instruments (2) |
| |
| — |
| |
| | |||||
Pension plans |
| |
| — |
| — |
| | |||||
Total assets | $ | | $ | | $ | | $ | | |||||
Liabilities: | |||||||||||||
Forward derivative contracts (1) | $ | — | $ | ( | $ | — | $ | ( | |||||
| (1) | Forward derivative contracts include the Partnership’s petroleum and ethanol physical and financial forwards and OTC swaps. |
| (2) | Amount includes the effect of cash balances on deposit with clearing brokers. |
There were no Level 3 derivative contracts at both June 30, 2022 and December 31, 2021. 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 8.
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
23
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):
June 30, 2022 | December 31, 2021 | |||||||||||
Face | Fair | Face | Fair | |||||||||
Value | Value | Value | Value | |||||||||
$ | | $ | | $ | | $ | | |||||
$ | | $ | | $ | | $ | | |||||
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 2 for acquired assets and liabilities measured on a non-recurring basis.
Note 10. Environmental Liabilities
In connection with the acquisitions of retail gasoline and convenience store assets from Miller Oil and Consumers Petroleum (see Note 2), the Partnership assumed certain environmental liabilities, including certain ongoing environmental remediation efforts. As a result, the Partnership recorded, on an undiscounted basis, a total environmental liability of approximately $
The following table presents a summary roll forward of the Partnership’s environmental liabilities at June 30, 2022 (in thousands):
| Balance at |
|
|
| Other |
| Balance at |
| |||||||||||
December 31, | Additions | Payments | Dispositions | Adjustments | June 30, |
| |||||||||||||
Environmental Liability Related to: | 2021 | 2022 | 2022 | 2022 | 2022 | 2022 |
| ||||||||||||
Retail gasoline stations | $ | | $ | | $ | ( | $ | ( | $ | | $ | | |||||||
Terminals |
| |
| — |
| ( |
| ( |
| — |
| | |||||||
Total environmental liabilities | $ | | $ | | $ | ( | $ | ( | $ | | $ | | |||||||
Current portion | $ | | $ | | |||||||||||||||
Long-term portion |
| |
| | |||||||||||||||
Total environmental liabilities | $ | | $ | | |||||||||||||||
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.
24
Note 11. Related Party Transactions
The Partnership is a party to a services agreement with various entities which own limited partner interests in the Partnership and interests in the General Partner and which are
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 $
The table below presents receivables from the General Partner (in thousands):
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
Receivables from the General Partner (1) | $ | | $ | | |||
| (1) | Receivables from the General Partner reflect the Partnership’s prepayment of payroll taxes and payroll accruals to the General Partner and are due to the timing of the payroll obligations. |
Note 12. Partners’ Equity and Cash Distributions
Partners’ Equity
Common Units and General Partner Interest
At June 30, 2022, there were
Series A Preferred Units
At June 30, 2022, there were
25
Series B Preferred Units
At June 30, 2022, there were
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
The Partnership will make distributions of Available Cash from distributable cash flow for any quarter in the following manner:
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 $ |
| | % | | % | ||
Second Target Distribution |
| above $ |
| | % | | % | |
Third Target Distribution |
| above $ |
| | % | | % | |
Thereafter |
| above $ |
| | % | | % | |
The Partnership paid the following cash distributions to common unitholders during 2022 (in thousands, except per unit data):
For the |
| Per Unit |
|
|
|
|
| |||||||||||
Cash Distribution | Quarter | Cash | Common | General | Incentive | Total Cash |
| |||||||||||
Payment Date |
| Ended | Distribution | Units | Partner | Distribution | Distribution |
| ||||||||||
2/14/2022 (1) | 12/31/21 | $ | $ | | $ | | $ | | $ | | ||||||||
5/13/2022 (1) | 03/31/22 |
|
| |
| |
| |
| | ||||||||
| (1) | This distribution resulted in the Partnership reaching its third target level distribution for this quarter. As a result, the General Partner, as the holder of the IDRs, received an incentive distribution. |
In addition, on July 26, 2022, the board of directors of the General Partner declared a quarterly cash distribution of $
26
April 1, 2022 through June 30, 2022. On August 12, 2022, the Partnership will pay this cash distribution to its common unitholders of record as of the close of business on August 8, 2022.
Preferred Units
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 (each, a “Series A Distribution Payment Date”), commencing on November 15, 2018, to holders of record as of the opening of business on the February 1, May 1, August 1 or November 1 next preceding the Series A 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 Series A Distribution Payment Date.
Distributions on the Series B Preferred Units are cumulative from March 24, 2021, the original issue date of the Series B Preferred Units, and payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year (each, a “Series B Distribution Payment Date”), commencing on May 15, 2021, to holders of record as of the opening of business on the February 1, May 1, August 1 or November 1 next preceding the Series B 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 B Preferred Units will be paid out of Available Cash with respect to the quarter immediately preceding the applicable Series B Distribution Payment Date.
The Partnership paid the following cash distributions on the Series A Preferred Units and the Series B Preferred Units during 2022 (in thousands, except per unit data):
Series A Preferred Units |
| Series B Preferred Units |
| ||||||||||||
For the | Per Unit | Per Unit | |||||||||||||
Cash Distribution | Quarterly Period | Cash | Total Cash | Cash | Total Cash |
| |||||||||
Payment Date |
| Covering | Distribution |
| Distribution |
| Distribution |
| Distribution |
| |||||
2/15/2022 | 11/15/21 - 2/14/22 | $ | | $ | | $ | | $ | | ||||||
5/16/2022 | 2/15/22 - 5/14/22 | | | | | ||||||||||
In addition, on July 18, 2022, the board of directors (“the Board”) of the General Partner declared a quarterly cash distribution of $
The Board also declared a quarterly cash distribution of $
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Note 13. Segment Reporting
Summarized financial information for the Partnership’s reportable segments is presented in the table below (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 | |||||||
Wholesale Segment: | |||||||||||||
Sales | |||||||||||||
Gasoline and gasoline blendstocks | $ | | $ | | $ | | $ | | |||||
Other oils and related products (1) |
| |
| |
| |
| | |||||
Crude oil (2) |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
Product margin | |||||||||||||
Gasoline and gasoline blendstocks | $ | | $ | | $ | | $ | | |||||
Other oils and related products (1) |
| |
| |
| |
| | |||||
Crude oil (2) |
| ( |
| ( |
| ( |
| ( | |||||
Total | $ | | $ | | $ | | $ | | |||||
Gasoline Distribution and Station Operations Segment: | |||||||||||||
Sales | |||||||||||||
Gasoline | $ | | $ | | $ | | $ | | |||||
Station operations (3) |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
Product margin | |||||||||||||
Gasoline | $ | | $ | | $ | | $ | | |||||
Station operations (3) |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
Commercial Segment: | |||||||||||||
Sales | $ | | $ | | $ | | $ | | |||||
Product margin | $ | | $ | | $ | | $ | | |||||
Combined sales and Product margin: | |||||||||||||
Sales | $ | | $ | | $ | | $ | | |||||
Product margin (4) | $ | | $ | | $ | | $ | | |||||
Depreciation allocated to cost of sales |
| ( |
| ( |
| ( |
| ( | |||||
Combined gross profit | $ | | $ | | $ | | $ | | |||||
| (1) | Other oils and related products primarily consist of distillates and residual oil. |
| (2) | Crude oil consists of the Partnership’s crude oil sales and revenue from its logistics activities. |
| (3) | Station operations consist of convenience store and prepared food sales, rental income and sundries. |
| (4) | Product margin is a non-GAAP financial measure used by management and external users of the Partnership’s consolidated financial statements to assess its business. The table above includes a reconciliation of product margin on a combined basis to gross profit, a directly comparable GAAP measure. |
Approximately
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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):
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, |
| |||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 |
| ||||||
Combined gross profit | $ | | $ | | $ | | $ | | |||||
Operating costs and expenses not allocated to operating segments: | |||||||||||||
Selling, general and administrative expenses |
| |
| |
| |
| | |||||
Operating expenses |
| |
| |
| |
| | |||||
Amortization expense | | | | | |||||||||
Net gain on sale and disposition of assets | ( | ( | ( | ( | |||||||||
Long-lived asset impairment | — | | — | | |||||||||
Total operating costs and expenses |
| |
| |
| |
| | |||||
Operating income |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Income tax expense |
| ( |
| ( |
| ( |
| ( | |||||
Net income | $ | | $ | | $ | | $ | | |||||
The Partnership’s foreign assets and foreign sales were immaterial as of and for the three and six months ended June 30, 2022 and 2021.
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, 2022 and December 31, 2021 (in thousands):
| Wholesale |
| Commercial |
| GDSO |
| Unallocated |
| Total | ||||||
June 30, 2022 |
| $ | |
| $ | — |
| $ | |
| $ | |
| $ | |
December 31, 2021 |
| $ | |
| $ | — |
| $ | |
| $ | |
| $ | |
Note 14. 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.
Common units outstanding as reported in the accompanying consolidated financial statements at June 30, 2022 and December 31, 2021, respectively, excludes
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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 preferred unitholders) for purposes of computing net income per common limited partner unit for the periods presented (in thousands, except per unit data):
Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 |
| ||||||||||||||||||||||||
| Common |
| General |
|
|
|
| Common |
| General |
|
| ||||||||||||||
Limited | Partner | Limited | Partner |
| ||||||||||||||||||||||
Numerator: |
| Total |
| Partners |
| Interest |
| IDRs |
|
| Total |
| Partners |
| Interest |
| IDRs |
| ||||||||
Net income | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | $ | — | ||||||||||
Declared distribution | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Assumed allocation of undistributed net income (loss) |
| |
| |
| |
| — |
| ( |
| ( |
| ( |
| — | ||||||||||
Assumed allocation of net income | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Less: Preferred limited partner interest in net income | | | ||||||||||||||||||||||||
Net income attributable to common limited partners | $ | | $ | | ||||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||||
Basic weighted average common units outstanding |
| |
| | ||||||||||||||||||||||
Dilutive effect of phantom units |
| |
| | ||||||||||||||||||||||
Diluted weighted average common units outstanding |
| |
| | ||||||||||||||||||||||
Basic net income per common limited partner unit | $ | | $ | | ||||||||||||||||||||||
Diluted net income per common limited partner unit | $ | | $ | | ||||||||||||||||||||||
Six Months Ended June 30, 2022 |
|
| Six Months Ended June 30, 2021 |
| ||||||||||||||||||||||
| Common |
| General |
|
| Common |
| General |
|
| ||||||||||||||||
Limited | Partner | Limited | Partner |
| ||||||||||||||||||||||
Numerator: | Total | Partners | Interest | IDRs |
|
| Total |
| Partners |
| Interest |
| IDRs |
| ||||||||||||
Net income | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | $ | — | ||||||||||
Declared distribution | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Assumed allocation of undistributed net income (loss) |
| |
| |
| |
| — |
| ( |
| ( |
| ( |
| — | ||||||||||
Assumed allocation of net income | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Less: Preferred limited partner interest in net income | | | ||||||||||||||||||||||||
Net income attributable to common limited partners | $ | | $ | | ||||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||||
Basic weighted average common units outstanding |
| |
| | ||||||||||||||||||||||
Dilutive effect of phantom units |
| |
| | ||||||||||||||||||||||
Diluted weighted average common units outstanding |
| |
| | ||||||||||||||||||||||
Basic net income per common limited partner unit | $ | | $ | | ||||||||||||||||||||||
Diluted net income per common limited partner unit | $ | | $ | | ||||||||||||||||||||||
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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 26, 2022 | $ | | March 31, 2022 | ||||
July 26, 2022 | $ | | June 30, 2022 | ||||
The board of directors of the General Partner declared the following quarterly cash distributions on the Series A Preferred Units and the Series B Preferred Units:
| Series A Preferred Units | Series B Preferred Units |
|
| ||||||
Per Unit Cash | Per Unit Cash | Distribution Declared for the | ||||||||
Cash Distribution Declaration Date | Distribution Declared | Distribution Declared | Quarterly Period Covering |
| ||||||
April 18, 2022 | $ | | $ |
| February 15, 2022 - May 14, 2022 | |||||
July 18, 2022 | $ | | $ | May 15, 2022 - August 14, 2022 | ||||||
See Note 12, “Partners’ Equity and Cash Distributions” for further information.
Note 15. Changes in Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive income by component for the periods presented (in thousands):
| Pension | ||
Three Months Ended June 30, 2022 | Plan | ||
Balance at March 31, 2022 | $ | ( | |
Other comprehensive loss |
| ( | |
Amount of (income) loss reclassified from accumulated other comprehensive income (loss) |
| ( | |
Total comprehensive loss |
| ( | |
Balance at June 30, 2022 | $ | ( | |
Six Months Ended June 30, 2022 | |||
Balance at December 31, 2021 | $ | ( | |
Other comprehensive loss |
| ( | |
Amount of (income) loss reclassified from accumulated other comprehensive income (loss) |
| ( | |
Total comprehensive loss |
| ( | |
Balance at June 30, 2022 | $ | ( | |
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.
Note 16. Legal Proceedings
General
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 10 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
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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.
Other
In January 2022, the Partnership was served with a complaint filed in the Middlesex County Superior Court of the Commonwealth of Massachusetts against the Partnership and its wholly owned subsidiaries, Global Companies LLC (“Global Companies”) and Alliance Energy LLC (“Alliance”), alleging, among other things, that a plaintiff truck driver, while (1) loading gasoline and diesel fuel at terminals owned and operated by the Partnership located in Albany, New York and Revere, Massachusetts and (2) unloading gasoline and diesel fuel at gasoline stations owned and/or operated by the Partnership throughout New York, Massachusetts and New Hampshire, contracted aplastic anemia as a result of exposure to benzene-containing products and/or vapors therefrom. The Partnership, Global Companies and Alliance have meritorious defenses to the allegations in the complaint and will vigorously contest the actions taken by the plaintiff.
In October 2020, the Partnership was served with a complaint filed against the Partnership and its wholly owned subsidiary, Global Companies alleging, among other things, wrongful death and loss of consortium. The complaint, filed in the Middlesex County Superior Court of the Commonwealth of Massachusetts, alleges, among other things, that a truck driver (whose estate is a co-plaintiff), while loading gasoline and diesel fuel at terminals owned and operated by the Partnership located in Albany, New York and Burlington, Vermont, was exposed to benzene-containing products and/or vapors therefrom. The Partnership and Global Companies have meritorious defenses to the allegations in the complaint and will vigorously contest the actions taken by the plaintiffs.
On August 2, 2016, the Partnership received a Notice of Violation (“NOV”) from the Environmental Protection Agency’s (“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 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
32
Partnership that it would not seek a further extension of the tolling period. The EPA declined to take 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.
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 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.
The Partnership received a Subpoena Duces Tecum dated May 13, 2022 from the Office of the Attorney General of the State of New York (“NY AG”) requesting information regarding charges paid by retailers, distributors, or consumers for oil and gas products in or within the proximity of the State of New York during the disruption of the market triggered by Russia’s 2022 invasion of Ukraine. The Partnership has been advised that the NY AG’s office sent similar subpoena requests for information to market participants across the petroleum industry.
The Partnership received a letter from the Office of the Attorney General of the State of Connecticut (“CT AG”) dated June 28, 2022 seeking information from the Partnership related to its sales of motor fuel to retailers within the State of Connecticut from February 3, 2022 through June 28, 2022. The Partnership has been advised that the CT AG’s office sent similar requests for information to market participants across the petroleum industry.
Note 17. New Accounting Standards
There have been no recently issued accounting standards that are expected to have a material impact on the Partnership’s consolidated financial statements.
Note 18. Subsequent Events
Distribution to Common Unitholders—On July 26, 2022, the board of directors of the General Partner declared a quarterly cash distribution of $
33
Distribution to Series A Preferred Unitholders—On July 18, 2022, the board of directors of the General Partner declared a quarterly cash distribution of $
Distribution to Series B Preferred Unitholders—On July 18, 2022, the board of directors of the General Partner declared a quarterly cash distribution of $
34
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 although not all forward-looking statements contain such identifying words. 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:
| ● | We may not have sufficient cash from operations to enable us to pay distributions on the Series A Preferred Units or the Series B Preferred Units (each as defined in Note 12 of Notes to Consolidated Financial Statements) or maintain distributions on our common units at current levels following establishment of cash reserves and payment of fees and expenses, including payments to our general partner. |
| ● | A significant decrease in price or demand for the products we sell or a significant decrease in the pricing of and demand for our logistics activities could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders. |
| ● | COVID-19 and certain developments in global oil markets have had, and may from time to time 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 impact on the global economy and commodity prices resulting from the conflict in Ukraine may have a negative impact on our financial condition and results of operations. |
| ● | We may not be able to fully implement or capitalize upon planned growth projects. Even if we consummate acquisitions or expend capital in pursuit of growth projects that we believe will be accretive, they may in fact result in no increase or even a decrease in cash available for distribution to our unitholders. |
35
| ● | The condition of credit markets may adversely affect our liquidity. |
36
| ● | Our credit agreement and the indentures governing our senior notes contain operating and financial covenants, and our credit agreement contains borrowing base requirements. A failure to comply with the operating and financial covenants in our credit agreement, the indentures and any future financing agreements could impact our access to bank loans and other sources of financing as well as our ability to pursue our business activities. |
| ● | A significant increase in interest rates could adversely affect our results of operations and cash available for distribution to our unitholders and our ability to service our indebtedness. |
| ● | Our gasoline station and convenience store business could expose us to an increase in consumer litigation and result in an unfavorable outcome or settlement of one or more lawsuits where insurance proceeds are insufficient or otherwise unavailable. |
| ● | Congress has given the Food and Drug Administration (“FDA”) broad authority to regulate tobacco and nicotine products, and the FDA, states and some municipalities have enacted and are pursuing enaction of numerous regulations restricting the sale of such products. These governmental actions, as well as national, state and municipal campaigns to discourage smoking, tax increases, and imposition of regulations restricting the sale of flavored tobacco products, e-cigarettes and vapor products, have and could result in reduced consumption levels, higher costs which we may not be able to pass on to our customers, and reduced overall customer traffic. Also, increasing regulations related to and restricting the sale of flavored tobacco products, e-cigarettes and vapor products may offset some of the gains we have experienced from selling these types of products. These factors could materially affect the sale of this product mix which in turn could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders. |
| ● | Our businesses could expose us to litigation and result in an unfavorable outcome or settlement of one or more lawsuits where insurance proceeds are insufficient or otherwise unavailable. |
37
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, 2021 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.
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, 2022, we had a portfolio of 1,683 owned, leased and/or supplied gasoline stations, including 343 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 $5.2 billion and $9.6 billion of refined petroleum products, gasoline blendstocks, renewable fuels and crude oil for the three and six months ended June 30, 2022, 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, 2022, respectively, from convenience store and prepared food 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.
COVID-19
Although the impact of COVID-19 has declined to date, it continues to make its presence felt in our corporate offices, at our retail sites and terminal locations and in the global supply chain. We continue to monitor these impacts while providing essential products and services, prioritizing the safety of our employees, customers and vendors in the communities where we operate.
COVID-19 resulted in an economic downturn, restricted travel to, from and within the states in which we conduct our businesses, and in decreases in the demand for gasoline and convenience store products. While market conditions have improved, COVID-19 may continue to impact our operations and financial performance, and uncertainties surrounding the duration of COVID-19 and demand at the pump, inside our stores and at our terminals remain.
The extent to which COVID-19 may continue to affect our operating results remains uncertain. COVID-19 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.
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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 reflect changes which may 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.
2022 Events
Sale of the Revere Terminal—On June 28, 2022, we completed the sale of our terminal located on Boston Harbor in Revere, Massachusetts (the “Revere Terminal”) to Revere MA Owner LLC (the “Revere Buyer”) for a purchase price of $150.0 million in cash. In connection with closing under the purchase agreement between us and the Revere Buyer, we entered into a leaseback agreement, which meets the criteria for sale accounting, with the Revere Buyer pursuant to which we lease back key infrastructure at the Revere Terminal, including certain tanks, dock access rights, and loading rack infrastructure, to allow us to continue business operations at the Revere Terminal. The term of the leaseback agreement, including all renewal options exercisable at our election, could extend through September 30, 2039.
Pursuant to the terms of the purchase agreement we entered into with affiliates of the Slifka family (the “Initial Sellers”), related parties, in 2015 to acquire the Revere Terminal, the Initial Sellers are entitled to an amount equal to fifty percent of the net proceeds (as defined in the 2015 purchase agreement) (the “Initial Sellers Share”) from the sale of the Revere Terminal. At the time of the 2022 closing, the preliminary calculation of the Initial Sellers Share was approximately $44.3 million, which amount is subject to future revisions. The final calculation of the Initial Sellers Share, including a sharing of any additional expenses in order to satisfy outstanding obligations under our current government storage contract at the Revere Terminal and potential operating losses or profits relating to the operation of the Revere Terminal during the initial leaseback term, will occur upon the expiration of such storage contract. After closing costs and the preliminary payment of the Initial Sellers Share, we received net proceeds of approximately $98.8 million, which is included in proceeds from sale of property and equipment, net in the accompanying consolidated statement of cash flows for the six months ended June 30, 2022.
In connection with the sale of the Revere Terminal, we recognized a net gain of approximately $76.7 million for each of the three and six months ended June 30, 2022, which is included in net gain on sale and disposition of assets in the accompanying consolidated statements of income. The preliminary payment of approximately $44.3 million to the Initial Sellers is included in the measurement of the $76.7 million net gain recognized.
Amendments to the Credit Agreement—On March 9, 2022, we and certain of our subsidiaries entered into the sixth amendment to third amended and restated credit agreement which, among other things, increased the total aggregate commitment to $1.55 billion. On March 30, 2022, we and certain of our subsidiaries entered into the seventh amendment to third amended and restated credit agreement which, among other things, refreshed the accordion feature under the credit agreement. See “—Liquidity and Capital Resources—Credit Agreement.”
Acquisition from Miller Oil Co., Inc.—On February 1, 2022, we acquired substantially all of the retail motor fuel assets from Miller Oil Co., Inc. (“Miller Oil”) for approximately $60.1 million, including inventory, funded with borrowings under our revolving credit facility. The acquisition includes 21 company-operated Miller’s Neighborhood Market convenience stores and 2 fuel sites that are either owned or leased, including lessee dealer and commissioned agent locations, all located in Virginia, and 34 fuel supply only sites, primarily in Virginia. See Note 2 of Notes to Consolidated Financial Statements.
Acquisition from Consumers Petroleum of Connecticut Incorporated—On January 25, 2022, we acquired substantially all of the assets from Consumers Petroleum of Connecticut, Incorporated (“Consumers Petroleum”) for approximately $154.7 million, including inventory, funded with borrowings under our revolving credit facility. The acquisition includes 26 company-owned Wheels convenience stores and related fuel operations located in Connecticut
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and 22 fuel-supply only sites located in Connecticut and New York. See Note 2 of Notes to Consolidated Financial Statements.
Operating Segments
We purchase refined petroleum products, gasoline blendstocks, renewable fuels and crude oil 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.
Wholesale
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 and residual oil to home heating oil 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 store and prepared food sales, (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, 2022, we had a portfolio of owned, leased and/or supplied gasoline stations, primarily in the Northeast, that consisted of the following:
Company operated | 343 | |
Commissioned agents | 292 | |
Lessee dealers | 196 | |
Contract dealers | 852 | |
Total | 1,683 |
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/or 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
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relationships with distributors in certain New England states pursuant to which we source and supply these distributors’ gasoline stations with ExxonMobil-branded gasoline.
Commercial
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 months. 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, COVID-19 has had a negative impact on gasoline demand and the extent and duration of that impact remains 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 “—COVID-19,” 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:
| ● | Our businesses are influenced by the overall markets for refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane and increases and/or decreases in the prices of these products may adversely impact our financial condition, results of operations and cash available for distribution to our unitholders and the amount of borrowing available for working capital under our credit agreement. Results from our purchasing, storing, terminalling, transporting, selling and blending operations are influenced by prices for refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane, price volatility and the market for such products. Prices in the overall markets for these products may affect our financial condition, results of operations and cash available for distribution to our unitholders. Our margins can be significantly impacted by the forward product pricing curve, often referred to as the futures market. We typically hedge our exposure to petroleum product and renewable fuel price moves with futures contracts and, to a lesser extent, swaps. In markets where future prices are higher than current prices, referred to as contango, we may use our storage capacity to improve our margins by storing products we have purchased at lower prices in the current market for delivery to customers at higher prices in the future. In markets where future prices are lower than current prices, referred to as backwardation, inventories can depreciate in value and hedging costs are more expensive. For this reason, in these backward markets, we attempt to reduce our inventories in order to minimize these effects. 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 oil markets may impact our results. When prices for the products we sell rise, some of our customers may have insufficient credit to purchase supply from us at their historical purchase volumes, and their customers, in turn, may adopt conservation measures which reduce consumption, thereby reducing demand for product. Furthermore, when prices increase rapidly and dramatically, we may be unable to promptly pass our additional costs on to our customers, resulting in lower margins which could adversely affect our results of operations. Higher prices for the products we sell may (1) diminish our |
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| access to trade credit support and/or cause it to become more expensive and (2) decrease the amount of borrowings available for working capital under our credit agreement as a result of total available commitments, borrowing base limitations and advance rates thereunder. When prices for the products we sell decline, our exposure to risk of loss in the event of nonperformance by our customers of our forward contracts may be increased as they and/or their customers may breach their contracts and purchase the products we sell at the then lower market price from a competitor. |
| ● | We commit substantial resources to pursuing acquisitions and expending capital for growth projects, although there is no certainty that we will successfully complete any acquisitions or growth projects or receive the economic results we anticipate from completed acquisitions or growth projects. We are continuously engaged in discussions with potential sellers and lessors of existing (or suitable for development) terminalling, storage, logistics and/or marketing assets, including gasoline stations, convenience stores and related businesses, and also consider organic growth projects. Our growth largely depends on our ability to make accretive acquisitions and/or accretive development projects. We may be unable to execute such accretive transactions for a number of reasons, including the following: (1) we are unable to identify attractive transaction candidates or negotiate acceptable terms; (2) we are unable to obtain financing for such transactions on economically acceptable terms; or (3) we are outbid by competitors. Many of these transactions involve numerous regulatory, environmental, commercial and legal uncertainties beyond our control. Required approvals, permits and licenses may not be obtained, may be delayed or may be obtained with conditions that materially alter the expected return associated with the underlying projects. In addition, we may consummate transactions that we believe will be accretive but that ultimately may not be accretive. If any of these events were to occur, our future growth and ability to increase or maintain distributions on our common units could be limited. We can give no assurance that our transaction efforts will be successful or that any such efforts will be completed on terms that are favorable to us. |
| ● | The condition of credit markets may adversely affect our liquidity. In the past, world financial markets experienced a severe reduction in the availability of credit. Possible negative impacts in the future could include a decrease in the availability of borrowings under our credit agreement, increased counterparty credit risk on our derivatives contracts and our contractual counterparties could require us to provide collateral. In addition, we could experience a tightening of trade credit from our suppliers. |
| ● | We depend upon marine, pipeline, rail and truck transportation services for a substantial portion of our logistics activities in transporting the products we sell. Implementation of regulations and directives related to these aforementioned services as well as disruption in any of these transportation services could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders. Hurricanes, flooding and other severe weather conditions could cause a disruption in the transportation services we depend upon and could affect the flow of service. In addition, accidents, labor disputes between providers and their employees and labor renegotiations, including strikes, lockouts or a work stoppage, shortage of railcars, trucks and barges, mechanical difficulties or bottlenecks and disruptions in transportation logistics could also disrupt our business operations. These events could result in service disruptions and increased costs which could also adversely affect our financial condition, results of operations and cash available for distribution to our unitholders. Other disruptions, such as those due to an act of terrorism or war, could also adversely affect our businesses. |
| ● | We have contractual obligations for certain transportation assets such as railcars, barges and pipelines. A decline in demand for (i) the products we sell or (ii) our logistics activities, could result in a decrease in the utilization of our transportation assets, which could negatively impact our financial condition, results of operations and cash available for distribution to our unitholders. |
| ● | Our gasoline financial results in our GDSO segment can be lower in the first and fourth quarters of the calendar year due to seasonal fluctuations in demand. 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 months. 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 results of operations in gasoline can be lower in the first and fourth quarters of the calendar year. COVID-19 has |
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| had a negative impact on gasoline demand and in-store traffic, and the extent and duration of that impact remains uncertain. |
| ● | Our heating oil and residual oil financial results can be lower in the second and third quarters of the calendar year. Demand for some refined petroleum products, specifically home heating oil and residual oil for space heating purposes, is generally higher during November through March than during April through October. We obtain a significant portion of these sales during the winter months. |
| ● | Warmer weather conditions could adversely affect our results of operations and financial condition. Weather conditions generally have an impact on the demand for both home heating oil and residual oil. Because we supply distributors whose customers depend on home heating oil and residual oil for space heating purposes during the winter, warmer-than-normal temperatures during the first and fourth calendar quarters can decrease the total volume we sell and the gross profit realized on those sales. |
| ● | Energy efficiency, higher prices, new technology and alternative fuels could reduce demand for our heating oil and residual oil. 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 four 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. |
| ● | Changes in government usage mandates and tax credits could adversely affect the availability and pricing of ethanol and renewable fuels, which could negatively impact our sales. The EPA has implemented a Renewable Fuels Standard (“RFS”) pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program seeks to promote the incorporation of renewable fuels in the nation’s fuel supply and, to that end, sets annual quotas for the quantity of renewable fuels (such as ethanol) that must be blended into transportation fuels consumed in the United States. A RIN is assigned to each gallon of renewable fuel produced in or imported into the United States. We are exposed to volatility in the market price of RINs. We cannot predict the future prices of RINs. RIN prices are dependent upon a variety of factors, including EPA regulations related to the amount of RINs required and the total amounts that can be generated, the availability of RINs for purchase, the price at which RINs can be purchased, and levels of transportation fuels produced, all of which can vary significantly from quarter to quarter. If sufficient RINs are unavailable for purchase or if we have to pay a significantly higher price for RINs, or if we are otherwise unable to meet the EPA’s RFS mandates, our results of operations and cash flows could be adversely affected. Future demand for ethanol will be largely dependent upon |
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| the economic incentives to blend based upon the relative value of gasoline and ethanol, taking into consideration the EPA’s regulations on the RFS program and oxygenate blending requirements. A reduction or waiver of the RFS mandate or oxygenate blending requirements could adversely affect the availability and pricing of ethanol, which in turn could adversely affect our future gasoline and ethanol sales. In addition, changes in blending requirements or broadening the definition of what constitutes a renewable fuel could affect the price of RINs which could impact the magnitude of the mark-to-market liability recorded for the deficiency, if any, in our RIN position relative to our RVO at a point in time. Changes proposed by EPA for the renewable volume obligations may increase the cost to consumers for transportation fuel, which could result in a decline in demand for fuels and lower revenues for our business. |
| ● | Governmental action and campaigns to discourage smoking and use of other products may have a material adverse effect on our revenues and gross profit. Congress has given the FDA broad authority to regulate tobacco and nicotine products, and the FDA, states and some municipalities have enacted and are pursuing enaction of numerous regulations restricting the sale of such products. These governmental actions, as well as national, state and municipal campaigns to discourage smoking, tax increases, and imposition of regulations restricting the sale of flavored tobacco products, e-cigarettes and vapor products, have and could result in reduced consumption levels, higher costs which we may not be able to pass on to our customers, and reduced overall customer traffic. Also, increasing regulations related to and restricting the sale of flavored tobacco products, e-cigarettes and vapor products may offset some of the gains we have experienced from selling these types of products. These factors could materially affect the sale of this product mix which in turn could have an adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders. |
| ● | New, stricter environmental laws and other industry-related regulations or environmental litigation could significantly impact our operations and/or increase our costs, which could adversely affect our results of operations and financial condition. Our operations are subject to federal, state and municipal laws and regulations regulating, among other matters, logistics activities, product quality specifications and other environmental matters. The trend in environmental regulation has been towards more restrictions and limitations on activities that may affect the environment over time. For example, President Biden signed an executive order calling for new or more stringent emissions standards for new, modified and existing oil and gas facilities. Our businesses may be adversely affected by increased costs and liabilities resulting from such stricter laws and regulations. We try to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. Risks related to our environmental permits, including the risk of noncompliance, permit interpretation, permit modification, renewal of permits on less favorable terms, judicial or administrative challenges to permits by citizens groups or federal, state or municipal entities or permit revocation are inherent in the operation of our businesses, as it is with other companies engaged in similar businesses. We may not be able to renew the permits necessary for our operations, or we may be forced to accept terms in future permits that limit our operations or result in additional compliance costs. There can be no assurances as to the timing and type of such changes in existing laws or the promulgation of new laws or the amount of any required expenditures associated therewith. Climate change continues to attract considerable public and scientific attention. In recent years environmental interest groups have filed suit against companies in the energy industry related to climate change. Should such suits succeed, we could face additional compliance costs or litigation risks. |
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 (“SGA”), (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 and crude oil, as well as convenience store and prepared food 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:
| ● | our compliance with certain financial covenants included in our debt agreements; |
| ● | our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis; |
| ● | our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; |
| ● | our operating performance and return on invested capital as compared to those of other companies in the wholesale, marketing, storing and distribution of refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane, and in the gasoline stations and convenience stores business, without regard to financing methods and capital structure; and |
| ● | the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities. |
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 partnership agreement is net income plus depreciation and amortization minus maintenance capital expenditures, as well
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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 SGA 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 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):
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||||
Net income | $ | 162,807 | $ | 12,139 | $ | 193,292 | $ | 7,842 | |||||
EBITDA (1)(3) | $ | 211,764 | $ | 58,497 | $ | 291,601 | $ | 99,404 | |||||
Adjusted EBITDA (1)(3) | $ | 134,915 | $ | 58,677 | $ | 209,841 | $ | 99,109 | |||||
Distributable cash flow (2)(3)(4) | $ | 178,189 | $ | 26,623 | $ | 228,066 | $ | 40,577 | |||||
Wholesale Segment: | |||||||||||||
Volume (gallons) |
| 792,595 |
| 943,589 |
| 1,769,432 |
| 1,829,026 | |||||
Sales | |||||||||||||
Gasoline and gasoline blendstocks | $ | 2,002,632 | $ | 1,505,658 | $ | 3,422,858 | $ | 2,325,056 | |||||
Other oils and related products (5) |
| 999,151 |
| 474,909 |
| 2,355,154 |
| 1,190,078 | |||||
Crude oil (6) |
| 708 |
| 17,016 |
| 2,182 |
| 33,934 | |||||
Total | $ | 3,002,491 | $ | 1,997,583 | $ | 5,780,194 | $ | 3,549,068 | |||||
Product margin | |||||||||||||
Gasoline and gasoline blendstocks | $ | 41,034 | $ | 23,516 | $ | 38,749 | $ | 39,921 | |||||
Other oils and related products (5) |
| 51,852 |
| 13,340 |
| 104,974 |
| 31,955 | |||||
Crude oil (6) |
| (2,311) |
| (3,321) |
| (6,060) |
| (7,848) | |||||
Total | $ | 90,575 | $ | 33,535 | $ | 137,663 | $ | 64,028 | |||||
Gasoline Distribution and Station Operations Segment: | |||||||||||||
Volume (gallons) |
| 422,282 | 395,119 | 798,768 | 729,223 | ||||||||
Sales | |||||||||||||
Gasoline | $ | 1,813,436 | $ | 1,023,187 | $ | 3,090,397 | $ | 1,779,195 | |||||
Station operations (7) |
| 144,314 |
| 123,162 |
| 260,206 |
| 223,326 | |||||
Total | $ | 1,957,750 | $ | 1,146,349 | $ | 3,350,603 | $ | 2,002,521 | |||||
Product margin | |||||||||||||
Gasoline | $ | 129,852 | $ | 101,303 | $ | 244,738 | $ | 181,555 | |||||
Station operations (7) |
| 69,008 |
| 61,141 |
| 127,105 |
| 111,298 | |||||
Total | $ | 198,860 | $ | 162,444 | $ | 371,843 | $ | 292,853 | |||||
Commercial Segment: | |||||||||||||
Volume (gallons) |
| 95,394 |
| 68,482 |
| 212,196 |
| 149,913 | |||||
Sales | $ | 363,409 | $ | 135,213 | $ | 693,391 | $ | 280,883 | |||||
Product margin | $ | 12,512 | $ | 2,701 | $ | 20,653 | $ | 6,891 | |||||
Combined sales and product margin: | |||||||||||||
Sales | $ | 5,323,650 | $ | 3,279,145 | $ | 9,824,188 | $ | 5,832,472 | |||||
Product margin (8) | $ | 301,947 | $ | 198,680 | $ | 530,159 | $ | 363,772 | |||||
Depreciation allocated to cost of sales |
| (20,471) |
| (20,635) |
| (42,445) |
| (40,695) | |||||
Combined gross profit | $ | 281,476 | $ | 178,045 | $ | 487,714 | $ | 323,077 | |||||
GDSO portfolio as of June 30, 2022 and 2021: | 2022 | 2021 | |||||||||||
Company operated | 343 | 283 | |||||||||||
Commissioned agents | 292 | 283 | |||||||||||
Lessee dealers | 196 | 205 | |||||||||||
Contract dealers | 852 | 793 | |||||||||||
Total GDSO portfolio | 1,683 | 1,564 | |||||||||||
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Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||||
Weather conditions: | |||||||||||||
Normal heating degree days |
| 784 |
| 784 |
| 3,654 |
| 3,654 | |||||
Actual heating degree days |
| 657 |
| 590 |
| 3,425 |
| 3,290 | |||||
Variance from normal heating degree days |
| (16) | % | (25) | % |
| (6) | % | (10) | % | |||
Variance from prior period actual heating degree days |
| 11 | % | (36) | % |
| 4 | % | 1 | % | |||
| (1) | EBITDA and Adjusted EBITDA are non-GAAP financial measures which are discussed above under “—Evaluating Our Results of Operations.” The table below presents reconciliations of EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial measures. |
| (2) | Distributable cash flow is a non-GAAP financial measure which is discussed above under “—Evaluating Our Results of Operations.” As defined by our partnership agreement, distributable cash flow is not adjusted for certain non-cash items, such as net losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges. The table below presents reconciliations of distributable cash flow to the most directly comparable GAAP financial measures. |
| (3) | EBITDA, Adjusted EBITDA and distributable cash flow for each of the three and six months ended June 30, 2021 include a $6.6 million expense for compensation and benefits resulting from the passing of our general counsel in May of 2021. The expense relates to contractual commitments including the acceleration of grants previously awarded as well as a discretionary award in recognition of service. |
| (4) | Distributable cash flow includes a net gain on sale and disposition of assets of $76.8 million and $81.7 million for the three and six months ended June 30, 2022, respectively, primarily related to the sale of the Revere Terminal (see—“2022 Events”). The net gain on sale and disposition of assets for each of the three and six months ended June 30, 2021 was immaterial. |
| (5) | Other oils and related products primarily consist of distillates and residual oil. |
| (6) | Crude oil consists of our crude oil sales and revenue from our logistics activities. |
| (7) | Station operations consist of convenience store and prepared food sales, rental income and sundries. |
| (8) | Product margin is a non-GAAP financial measure which is discussed above under “—Evaluating Our Results of Operations.” The table above includes a reconciliation of product margin on a combined basis to gross profit, a directly comparable GAAP measure. |
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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):
Three Months Ended | Six Months Ended |
| |||||||||||
June 30, | June 30, | ||||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Reconciliation of net income to EBITDA and Adjusted EBITDA: | |||||||||||||
Net income | $ | 162,807 | $ | 12,139 | $ | 193,292 | $ | 7,842 | |||||
Depreciation and amortization |
| 24,951 |
| 25,505 |
| 51,652 |
| 50,480 | |||||
Interest expense |
| 21,056 |
| 20,320 |
| 42,530 |
| 40,679 | |||||
Income tax expense |
| 2,950 |
| 533 |
| 4,127 |
| 403 | |||||
EBITDA (1) | 211,764 | 58,497 | 291,601 | 99,404 | |||||||||
Net gain on sale and disposition of assets | (76,849) | (8) | (81,760) | (483) | |||||||||
Long-lived asset impairment | — | 188 | — | 188 | |||||||||
Adjusted EBITDA (1) | $ | 134,915 | $ | 58,677 | $ | 209,841 | $ | 99,109 | |||||
Reconciliation of net cash provided by (used in) operating activities to EBITDA and Adjusted EBITDA: | |||||||||||||
Net cash provided by (used in) operating activities | $ | 362,565 | $ | 52,425 | $ | 385,193 | $ | (53,558) | |||||
Net changes in operating assets and liabilities and certain non-cash items |
| (174,807) |
| (14,781) |
| (140,249) |
| 111,880 | |||||
Interest expense |
| 21,056 |
| 20,320 |
| 42,530 |
| 40,679 | |||||
Income tax expense |
| 2,950 |
| 533 |
| 4,127 |
| 403 | |||||
EBITDA (1) | 211,764 | 58,497 | 291,601 | 99,404 | |||||||||
Net gain on sale and disposition of assets | (76,849) | (8) | (81,760) | (483) | |||||||||
Long-lived asset impairment | — | 188 | — | 188 | |||||||||
Adjusted EBITDA (1) | $ | 134,915 | $ | 58,677 | $ | 209,841 | $ | 99,109 | |||||
| (1) | EBITDA and Adjusted EBITDA for each of the three and six months ended June 30, 2021 include a $6.6 million expense for compensation and benefits resulting from the passing of our general counsel in May of 2021. The expense relates to contractual commitments including the acceleration of grants previously awarded as well as a discretionary award in recognition of service. |
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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):
Three Months Ended | Six Months Ended |
| ||||||||||||
June 30, | June 30, | |||||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||||
Reconciliation of net income to distributable cash flow: | ||||||||||||||
Net income | $ | 162,807 | $ | 12,139 | $ | 193,292 | $ | 7,842 | ||||||
Depreciation and amortization |
| 24,951 |
| 25,505 |
| 51,652 |
| 50,480 | ||||||
Amortization of deferred financing fees |
| 1,347 |
| 1,255 |
| 2,737 |
| 2,599 | ||||||
Amortization of routine bank refinancing fees |
| (1,138) |
| (1,013) |
| (2,319) |
| (2,050) | ||||||
Maintenance capital expenditures |
| (9,778) |
| (11,263) |
| (17,296) |
| (18,294) | ||||||
Distributable cash flow (1)(2)(3) | 178,189 | 26,623 | 228,066 | 40,577 | ||||||||||
Distributions to preferred unitholders (4) | (3,463) | (3,463) | (6,926) | (5,283) | ||||||||||
Distributable cash flow after distributions to preferred unitholders | $ | 174,726 | $ | 23,160 | $ | 221,140 | $ | 35,294 | ||||||
Reconciliation of net cash provided by (used in) operating activities to distributable cash flow: | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 362,565 | $ | 52,425 | $ | 385,193 | $ | (53,558) | ||||||
Net changes in operating assets and liabilities and certain non-cash items |
| (174,807) |
| (14,781) |
| (140,249) |
| 111,880 | ||||||
Amortization of deferred financing fees |
| 1,347 |
| 1,255 |
| 2,737 |
| 2,599 | ||||||
Amortization of routine bank refinancing fees |
| (1,138) |
| (1,013) |
| (2,319) |
| (2,050) | ||||||
Maintenance capital expenditures |
| (9,778) |
| (11,263) |
| (17,296) |
| (18,294) | ||||||
Distributable cash flow (1)(2)(3) | 178,189 | 26,623 | 228,066 | 40,577 | ||||||||||
Distributions to preferred unitholders (4) | (3,463) | (3,463) | (6,926) | (5,283) | ||||||||||
Distributable cash flow after distributions to preferred unitholders | $ | 174,726 | $ | 23,160 | $ | 221,140 | $ | 35,294 | ||||||
| (1) | Distributable cash flow is a non-GAAP financial measure which is discussed above under “—Evaluating Our Results of Operations.” As defined by our partnership agreement, distributable cash flow is not adjusted for certain non-cash items, such as net losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges. |
| (2) | Distributable cash flow includes a net gain on sale and disposition of assets of $76.8 million and $81.7 million for the three and six months ended June 30, 2022, respectively, primarily related to the sale of the Revere Terminal (see—“2022 Events”). The net gain on sale and disposition of assets for each of the three and six months ended June 30, 2021 was immaterial. |
| (3) | Distributable cash flow for each of the three and six months ended June 30, 2021 includes a $6.6 million expense for compensation and benefits resulting from the passing of our general counsel in May of 2021. The expense relates to contractual commitments including the acceleration of grants previously awarded as well as a discretionary award in recognition of service. |
| (4) | Distributions to preferred unitholders represent the distributions payable to the Series A preferred unitholders and the Series B preferred unitholders earned during the period. These distributions are cumulative and payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. |
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Results of Operations
Consolidated Sales
Our total sales were $5.3 billion and $3.3 billion for the three months ended June 30, 2022 and 2021, respectively, an increase of $2.0 billion, or 61%, primarily due to an increase in prices. Our aggregate volume of product sold was 1.3 billion gallons and 1.4 billion gallons for the three months ended June 30, 2022 and 2021, respectively, decreasing 97 million gallons (consisting of a decrease of 151 million gallons in our Wholesale segment, primarily due to decreased volume in gasoline and gasoline blendstocks and crude oil, offset by increases of 27 million gallons in each of our GDSO and Commercial segments).
Our total sales were $9.8 billion and $5.8 billion for the six months ended June 30, 2022 and 2021, respectively, an increase of $4.0 billion, or 69%, primarily due to increases in prices and, to a lesser extent, volume sold. Our aggregate volume of product sold was 2.8 billion gallons and 2.7 billion gallons for the six months ended June 30, 2022 and 2021, respectively, increasing 72 million gallons (consisting of increases of 70 million gallons and 62 million gallons in our GDSO and Commercial segments, respectively, offset by a decrease of 60 million gallons in our Wholesale segment due to decreased volume in gasoline and gasoline blendstocks and crude oil, offset by an increase in other oils and related products).
Gross Profit
Our gross profit was $281.5 million and $178.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $103.5 million, or 58%. In our Wholesale segment, our product margins in gasoline and gasoline blendstocks and in other oils and related products benefitted from more favorable market conditions. In our GDSO segment, our product margins increased due to higher fuel margins (cents per gallon) and increased volume in gasoline distribution and improved margins in station operations due to increased activity at our convenience stores, both partially due to the acquisitions of Miller Oil and Consumers Petroleum (collectively the “Recent Acquisitions”). In our Commercial segment, our product margin increased largely due to an increase in bunkering activity.
Our gross profit was $487.7 million and $323.1 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $164.6 million, or 51%. In our GDSO segment, our product margins increased due to higher fuel margins (cents per gallon) and increased volume in gasoline distribution and improved margins in station operations due to increased activity at our convenience stores, both partially due to the Recent Acquisitions. Our Wholesale segment product margin increased largely due to more favorable market conditions in other oils and related products. In our Commercial segment, our product margin increased largely due to an increase in bunkering activity.
Results for Wholesale Segment
Gasoline and Gasoline Blendstocks. Sales from wholesale gasoline and gasoline blendstocks were $2.0 billion and $1.5 billion for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.5 billion, or 33%, primarily due to an increase in prices, partially offset by a decline in volume sold. Our gasoline and gasoline blendstocks product margin was $41.0 million and $23.5 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $17.5 million, or 74%, primarily due to more favorable market conditions in gasoline and, to a lesser extent, gasoline blendstocks.
Sales from wholesale gasoline and gasoline blendstocks were $3.4 billion and $2.3 billion for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.1 billion, or 47%, primarily due to an increase in prices, partially offset by a decline in volume sold. Our gasoline and gasoline blendstocks product margin was $38.7 million and $39.9 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of $1.2 million, or 3%, in part due to less favorable market conditions in the first quarter of 2022.
Other Oils and Related Products. Sales from other oils and related products (primarily distillates and residual oil) were $1.0 billion and $0.5 billion for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.5 billion, or 100%, primarily due to an increase in prices and to higher residual oil volume sold. Our product margin
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from other oils and related products was $51.9 million and $13.3 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $38.6 million, or 289%, primarily due to more favorable market conditions largely in distillates but also in residual oil.
Sales from other oils and related products were $2.3 billion and $1.2 billion for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.1 billion, or 92%, primarily due to increases in prices and volume sold. Our product margin from other oils and related products was $105.0 million and $31.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $73.1 million, or 229%, primarily due to more favorable market conditions largely in distillates but also in residual oil.
Crude Oil. Crude oil sales and logistics revenues were $0.7 million and $17.0 million for the three months ended June 30, 2022 and 2021, respectively, a decrease of $16.3 million, or 96%, primarily due to a decrease in volume sold. Our crude oil product margin was ($2.3 million) and ($3.3 million) for the three months ended June 30, 2022 and 2021, respectively, an increase of $1.0 million, or 30%, primarily due to the expiration of a pipeline connection agreement in August of 2021.
Crude oil sales and logistics revenues were $2.2 million and $33.9 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of $31.7 million, or 94%, primarily due to a decrease in volume sold. Our crude oil product margin was ($6.1 million) and ($7.8 million) for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.7 million, or 22%, primarily due to the expiration of a pipeline connection agreement in August of 2021.
Results for Gasoline Distribution and Station Operations Segment
Gasoline Distribution. Sales from gasoline distribution were $1.8 billion and $1.0 billion for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.8 billion, or 80%, primarily due to an increase in prices and an increase in volume sold due to the Recent Acquisitions. Our product margin from gasoline distribution was $129.9 million and $101.3 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $28.6 million, or 28%, primarily due to higher fuel margins (cents per gallon) and an increase in volume sold due to the Recent Acquisitions.
Sales from gasoline distribution were $3.1 billion and $1.8 billion for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.3 billion, or 73%, primarily due to an increase in prices and an increase in volume sold in part due to the Recent Acquisitions. Our product margin from gasoline distribution was $244.7 million and $181.6 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $63.1 million, or 35%, primarily due to higher fuel margins (cents per gallon) and an increase in volume sold in part due to the Recent Acquisitions.
Station Operations. Our station operations, which include (i) convenience store and prepared food 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 $144.3 million and $123.2 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $21.1 million, or 17%. Our product margin from station operations was $69.0 million and $61.1 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $7.9 million, or 13%. The increases in sales and product margin are primarily due to an increase in activity at our convenience stores, in part due to the Recent Acquisitions.
Sales from our station operations were $260.2 million and $223.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $36.9 million, or 16%. Our product margin from station operations was $127.1 million and $111.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $15.8 million, or 14%. The increases in sales and product margin are primarily due to an increase in activity at our convenience stores, in part due to the Recent Acquisitions.
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Results for Commercial Segment
Our commercial sales were $363.4 million and $135.2 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $228.2 million or 169%, due to increases in prices and volume sold. Our commercial product margin was $12.5 million and $2.7 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $9.8 million, or 363%. The increases in sales and product margin are largely due to an increase in bunkering activity.
Our commercial sales were $693.4 million and $280.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $412.5 million or 147%, due to increases in prices and volume sold. Our commercial product margin was $20.7 million and $6.9 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $13.8 million, or 200%. The increases in sales and product margin are largely due to an increase in bunkering activity.
Selling, General and Administrative Expenses
SGA expenses were $60.8 million and $54.0 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $6.8 million, or 13%, including increases of $6.6 million in accrued discretionary incentive compensation, $3.1 million in wages and benefits, $1.2 million in advertising and marketing expenses and $2.5 million in various other SGA expenses. The increase in SGA expenses was offset by a $6.6 million expense incurred in the second quarter of 2021 for compensation and benefits resulting from the passing of our general counsel. The $6.6 million expense relates to contractual commitments including the acceleration of grants previously awarded as well as a discretionary award in recognition of service.
SGA expenses were $117.1 million and $100.3 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $16.8 million, or 17%, including increases of $11.5 million in accrued discretionary incentive compensation, $5.5 million in wages and benefits, $1.5 million in advertising and marketing expenses and $4.9 million in various other SGA expenses. The increase in SGA expenses was offset by a $6.6 million expense incurred in the second quarter of 2021 for compensation and benefits resulting from the passing of our general counsel. The $6.6 million expense relates to contractual commitments including the acceleration of grants previously awarded as well as a discretionary award in recognition of service.
Operating Expenses
Operating expenses were $108.5 million and $88.2 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $20.3 million, or 23%, including an increase of $21.1 million associated with our GDSO operations, including the Recent Acquisitions, in part due to increased credit card fees related to the increases in volume and price, higher salary expense and higher rent expense due in part to greater activity at our stores. Operating expenses associated with our terminal operations decreased $0.8 million.
Operating expenses were $207.8 million and $168.7 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $39.1 million, or 23%, including an increase of $40.0 million associated with our GDSO operations, including the Recent Acquisitions, in part due to increased credit card fees related to the increases in volume and price, higher salary expense and higher rent expense due in part to greater activity at our stores. Operating expenses associated with our terminal operations decreased $0.9 million.
Amortization Expense
Amortization expense related to intangible assets was $2.1 million and $2.7 million for the three months ended June 30, 2022 and 2021, respectively, and $4.6 million and $5.4 million for the six months ended June 30, 2022 and 2021, respectively.
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Net Gain on Sale and Disposition of Assets
Net gain on sale and disposition of assets was $76.8 million and $81.7 million for the three and six months ended June 30, 2022, respectively, primarily related to the sale of the Revere Terminal (see “—2022 Events” for more information). For the six months ended June 30, 2022, net gain on sale and disposition of assets also includes a net gain of $4.9 million, primarily due to the sale of GDSO sites. Net gain on sale and disposition of assets for each of the three and six months ended June 30, 2021 was immaterial.
Long-Lived Asset Impairment
We recognized an impairment charge relating to certain developmental assets for raze and rebuilds allocated to the GDSO segment in the amount of $0.2 million for each of the three and six months ended June 30, 2021.
Interest Expense
Interest expense was $21.0 million and $20.3 million for the three months ended June 30, 2022 and 2021, respectively, an increase of $0.7 million, or 3%, in part due to a higher average balance under our revolving credit facility due to the Recent Acquisitions.
Interest expense was $42.5 million and $40.7 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.8 million, or 4%, in part due to a higher average balance under our revolving credit facility.
Income Tax Expense
Income tax expense was $2.9 million and $0.5 million for the three months ended June 30, 2022 and 2021, respectively, and $4.1 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. The respective income tax expense reflects the income tax expense from the operating results of GMG, which is a taxable entity for federal and state income tax purposes.
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.
Working capital was $143.6 million and $225.5 million at June 30, 2022 and December 31, 2021, respectively, a decrease of $81.9 million. Changes in current assets and current liabilities decreasing our working capital primarily include an increase of $220.3 million in accounts payable primarily due to higher prices and a decrease of $78.5 million in inventories due to market structure. The decrease in working capital was offset by a decrease of $134.0 million in the current portion of our working capital revolving credit facility and an increase of $104.0 million in accounts receivable also primarily due to higher prices.
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Cash Distributions
Common Units
During 2022, we paid the following cash distributions to our common unitholders and our general partner:
|
| Distribution Paid for the | ||||
Cash Distribution Payment Date | Total Paid | Quarterly Period Ended | ||||
February 14, 2022 | $ | 20.9 million |
| Fourth quarter 2021 | ||
May 13, 2022 | $ | 21.3 million |
| First quarter 2022 | ||
In addition, on July 26, 2022, the board of directors of our general partner declared a quarterly cash distribution of $0.6050 per unit ($2.42 per unit on an annualized basis) on all of our outstanding common units for the period from April 1, 2022 through June 30, 2022 to our common unitholders of record as of the close of business on August 8, 2022. We expect to pay the total cash distribution of approximately $21.8 million on August 12, 2022.
Preferred Units
During 2022, we paid the following cash distributions to holders of the Series A Preferred Units and the Series B Preferred Units:
Series A | Series B |
| |||||||
Preferred Units | Preferred Units | Distribution Paid for the | |||||||
Cash Distribution Payment Date | Total Paid | Total Paid | Quarterly Period Covering | ||||||
February 15, 2022 | $ | 1.7 million | $ | 1.8 million |
| November 15, 2021 - February 14, 2022 | |||
May 16, 2022 | $ | 1.7 million | $ | 1.8 million |
| February 15, 2022 - May 14, 2022 | |||
In addition, on July 18, 2022, 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 the Series A Preferred Units for the period from May 15, 2022 through August 14, 2022 to our Series A preferred unitholders of record as of the opening of business on August 1, 2022. We expect to pay the total cash distribution of approximately $1.7 million on August 15, 2022.
The board of directors of our general partner also declared a quarterly cash distribution of $0.59375 per unit ($2.375 per unit on an annualized basis) on the Series B Preferred Units for the period from May 15, 2022 through August 14, 2022 to our Series B preferred unitholders of record as of the opening of business on August 1, 2022. We expect to pay the total cash distribution of approximately $1.8 million on August 15, 2022.
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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, 2022 were as follows (in thousands):
Payments Due by Period | ||||||||||
Remainder of |
| |||||||||
Contractual Obligations | 2022 | Beyond 2022 | Total |
| ||||||
Credit facility obligations (1) | $ | 37,917 | $ | 163,021 | $ | 200,938 | ||||
Senior notes obligations (2) |
| 26,031 |
| 1,046,408 |
| 1,072,439 | ||||
Operating lease obligations (3) |
| 39,580 |
| 295,100 |
| 334,680 | ||||
Other long-term liabilities (4) |
| 13,014 |
| 64,755 |
| 77,769 | ||||
Financing obligations (5) | 7,668 | 113,449 | 121,117 | |||||||
Total | $ | 124,210 | $ | 1,682,733 | $ | 1,806,943 | ||||
| (1) | Includes principal and interest on our working capital revolving credit facility and our revolving credit facility at June 30, 2022 and assumes a ratable payment through the expiration date. Our credit agreement has a contractual maturity of May 6, 2024 and no principal payments are required prior to that date. However, we repay amounts outstanding and reborrow funds based on our working capital requirements. Therefore, the current portion of the working capital revolving credit facility included in the accompanying consolidated balance sheets is the amount we expect to pay down during the course of the year, and the long-term portion of the working capital revolving credit facility is the amount we expect to be outstanding during the entire year Please read “—Credit Agreement” for more information on our working capital revolving credit facility. |
| (2) | Includes principal and interest on our senior notes. No principal payments are required prior to maturity. See Note 8 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information on our senior notes. |
| (3) | Includes operating lease obligations related to leases for office space and computer equipment, land, gasoline stations, railcars and barges. |
| (4) | Includes amounts related to our brand fee agreement and amounts related to our pipeline connection agreement, access right agreements and our pension and deferred compensation obligations. |
| (5) | Includes lease rental payments in connection with (i) the acquisition of Capitol Petroleum Group (“Capitol”) related to properties previously sold by Capitol within two sale-leaseback transactions; and (ii) the sale of real property assets and convenience stores. These transactions did not meet the criteria for sale accounting and the lease rental payments are classified as interest expense on the respective financing obligation and the pay-down of the related financing obligation. See Note 8 of Notes to Consolidated Financial Statement in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information. |
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 $17.3 million and $18.3 million in maintenance capital expenditures for the six months ended June 30, 2022 and 2021, respectively, which are included in capital expenditures in the accompanying consolidated statements of cash flows, of which approximately $16.0 million and $17.0 million for the six months ended June 30, 2022 and 2021, 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 $150.9 million and $20.4 million in
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expansion capital expenditures, including acquired property and equipment, for the six months ended June 30, 2022 and 2021, respectively, primarily related to investments in our gasoline station business.
For the six months ended June 30, 2022, the $150.9 million in expansion capital expenditures includes approximately $125.8 million in property and equipment associated with the acquisitions of Miller Oil and Consumers Petroleum (see Note 2 of Notes to Consolidated Financial Statements), and $25.1 million in expansion capital expenditures, primarily related to investments in our gasoline stations.
We currently expect maintenance capital expenditures of approximately $45.0 million to $55.0 million and expansion capital expenditures, excluding acquisitions, of approximately $50.0 million to $60.0 million in 2022, 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 COVID-19 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 COVID-19 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):
Six Months Ended |
| ||||||
June 30, | |||||||
2022 |
| 2021 |
| ||||
Net cash provided by (used in) operating activities | $ | 385,193 | $ | (53,558) | |||
Net cash used in investing activities | $ | (132,570) | $ | (44,102) | |||
Net cash (used in) provided by financing activities | $ | (256,091) | $ | 94,123 | |||
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 $385.2 million and ($53.5 million) for the six months ended June 30, 2022 and 2021, respectively, for a period-over-period increase in cash flow from operating activities of $438.7 million. The period-over-period change primarily reflects a net gain on the sale and disposition of assets of $81.7 million, primarily related to the sale of the Revere Terminal (see “—2022 Events”), and the increase in prices during the six months ended June 30, 2022 as compared the same period in 2021.
Except for net income, the primary drivers of the changes in operating activities include the following (in thousands):
Six Months Ended |
| ||||||
June 30, |
| ||||||
| 2022 |
| 2021 |
| |||
Increase in accounts receivable | $ | (103,734) | $ | (122,540) | |||
Decrease (increase) in inventories | $ | 83,037 | $ | (106,137) | |||
Increase in accounts payable | $ | 220,328 | $ | 39,765 | |||
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For the six months ended June 30, 2022, the increases in accounts receivable and accounts payable are largely due to the increase in prices. The decrease in inventories is primarily due to carrying lower levels of inventories during the period, offset by the increase in prices.
For the six months ended June 30, 2021, the increases in accounts receivable, inventories and accounts payable are largely due to the increase in prices.
Investing Activities
Net cash used in investing activities was $132.6 million for the six months ended June 30, 2022 and included $214.8 million in acquisitions ($154.7 million for Consumers Petroleum and $60.1 million for Miller Oil), $25.1 million in expansion capital expenditures and $17.3 million in maintenance capital expenditures. Net cash used in investing activities was offset by $124.6 million in proceeds from the sale of property and equipment, primarily related to the sale of the Revere Terminal.
Net cash used in investing activities was $44.1 million for the six months ended June 30, 2021 and included $20.4 million in expansion capital expenditures, $18.3 million in maintenance capital expenditures, $7.1 million in acquisitions primarily related to four company-operated gasoline stations and convenience stores, and $1.7 million in seller note issuances which represent notes we received from buyers in connection with the sale of certain of our gasoline stations. Net cash used in investing activities was offset by $3.4 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, 2022 and 2021.
Financing Activities
Net cash used in financing activities was $256.1 million for the six months ended June 30, 2022 and included $284.0 million in net payments on our working capital revolving credit facility, $49.1 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner and $2.6 million in the repurchase of common units pursuant to our repurchase program for future satisfaction of our LTIP obligations, offset by $79.6 million in net borrowings from our revolving credit facility, primarily to fund the Recent Acquisitions offset by payments on our revolving credit facility.
Net cash provided by financing activities was $94.1 million for the six months ended June 30, 2021 and included $158.5 million in net borrowing from our working capital revolving credit facility due primarily to the increase in prices and $72.2 million in net proceeds from the issuance of the Series B Preferred Units, offset by $88.6 million in net payments on our revolving credit facility, $44.1 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner and $3.8 million in the repurchase of common units pursuant to our repurchase program for future satisfaction of our LTIP obligations. The proceeds from the issuance of the Series B units were used to pay down the revolving credit facility.
See Note 7 of Notes to Consolidated Financial Statements for supplemental cash flow information related to our working capital revolving credit facility and revolving credit facility.
Credit Agreement
Certain subsidiaries of ours, as borrowers, and we and certain of our subsidiaries, as guarantors, have a $1.55 billion senior secured credit facility. The credit agreement expires on May 6, 2024.
On March 9, 2022, we and certain of our subsidiaries entered into a sixth amendment to the credit agreement which, among other things, amended certain terms and provisions of the credit agreement to provide for $200.0 million of working capital interim commitments which increased the total aggregate commitment from $1.35 billion to $1.55 billion. On March 30, 2022, we certain of our subsidiaries entered into a seventh amendment to the credit
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agreement which, among other things, (i) increased the working capital revolving credit facility by $200.0 million and simultaneous reduced the working capital interim commitments to $0; (ii) refreshed the accordion feature under the credit agreement to permit us to request increases of up to $300.0 million in the total credit facility; and (iii) replaced the Cost of Funds (as defined in the credit agreement) pricing option with a Daily SOFR pricing option. All other material terms of the credit agreement remain substantially the same as disclosed in Note 8 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
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.
There are two facilities under the credit agreement:
| ● | a working capital revolving credit facility to be used for working capital purposes and letters of credit in the principal amount equal to the lesser of our borrowing base and $1.1 billion; and |
| ● | a $450.0 million revolving credit facility to be used for general corporate purposes. |
In addition, the credit agreement has an accordion feature whereby we may request on the same terms and conditions then applicable to the credit agreement, provided no Event of Default (as defined in the credit agreement) then exists, an increase to the working capital revolving credit facility, the revolving credit facility, or both, by up to another $300.0 million, in the aggregate, for a total credit facility of up to $1.85 billion. Any such request for an increase must be in a minimum amount of $25.0 million. We cannot provide assurance, however, that our lending group will agree to fund any request by us for additional amounts in excess of the total available commitments of $1.55 billion.
In addition, the credit agreement includes a swing line pursuant to which Bank of America, N.A., as the swing line lender, may make swing line loans in U.S. dollars in an aggregate amount equal to the lesser of (a) $75.0 million and (b) the Aggregate WC Commitments (as defined in the credit agreement). Swing line loans will bear interest at the Base Rate (as defined in the credit agreement). The swing line is a sub-portion of the working capital revolving credit facility and is not an addition to the total available commitments of $1.55 billion.
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.
Borrowings under the working capital revolving credit facility bear interest at (1) the Daily or Term SOFR plus a 0.10% SOFR adjustment plus 2.00% to 2.50%, or (2) the base rate plus 1.00% to 1.50%, each depending on the Utilization Amount (as defined in the credit agreement). Borrowings under the revolving credit facility bear interest at (1) the Daily or Term SOFR plus a 0.10% SOFR adjustment plus 1.75% to 2.75%, or (2) the base rate plus 0.75% to 1.75%, each depending on the Combined Total Leverage Ratio (as defined in the credit agreement).
The average interest rates for the credit agreement were 2.9% and 2.4% for the three months ended June 30, 2022 and 2021, respectively, and 2.6% and 2.5% for the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, we had total borrowings outstanding under the credit agreement of $193.7 million, including $70.7 million outstanding on the revolving credit facility. In addition, we had outstanding letters of credit of $180.8 million. Subject to borrowing base limitations, the total remaining availability for borrowings and letters of credit was $1.18 billion and $795.9 million at June 30, 2022 and December 31, 2021, respectively.
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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, 2022.
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, 2021 for additional information on the credit agreement.
Senior Notes
We had 7.00% senior notes due 2027 and 6.875% senior notes due 2029 outstanding at June 30, 2022 and December 31, 2021. 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, 2021 for additional information on these senior notes.
Financing Obligations
We had financing obligations outstanding at June 30, 2022 and December 31, 2021 associated with historical sale-leaseback transactions that did not meet the criteria for sale accounting. Please read Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
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, 2021. There have been no material changes in our policies that had a significant impact on our financial condition and results of operations for the periods covered in this report.
During the three and six months ended June 30, 2022, there has been no material change to our critical accounting estimates discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021, with the addition of the following:
Business Combinations
Under the purchase method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record any excess of the purchase price over the fair value of the net tangible and intangible assets acquired as goodwill. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing purchased dealer supply contracts include, in part, the expected use of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
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Recent Accounting Pronouncements
A description and related impact expected from the adoption of certain new accounting pronouncements is provided in Note 17 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, 2022, we had total borrowings outstanding under our credit agreement of $193.7 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 $1.9 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 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.
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At June 30, 2022, 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) |
| ||||||
June 30, | Effect of 10% |
| Effect of 10% |
| ||||||
2022 | Price Increase | Price Decrease |
| |||||||
Exchange traded derivative contracts | $ | 58,943 | $ | (21,457) | $ | 21,457 | ||||
Forward derivative contracts |
| (36,317) |
| (6,881) |
| 6,881 | ||||
Total | $ | 22,626 | $ | (28,338) | $ | 28,338 | ||||
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, 2022. 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 $35.9 million at June 30, 2022.
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, 2022.
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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
The information required by this item is included in Note 16 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 in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
|
|
|
| Maximum Number (or |
| ||||
Total Number of | Approximate Dollar |
| |||||||
Units Purchased as | Value) of Units That May |
| |||||||
Total Number | Average | Part of Publicly | Yet Be Purchased |
| |||||
Of Units | Price Paid | Announced Plans or | Under the Plans or |
| |||||
Period | Purchased | Per Unit($) | Programs (1) | Programs (1) |
| ||||
April 1—April 30, 2022 |
| — |
| — |
| — |
| — | |
May 1—May 31, 2022 |
| 36,801 |
| 28.77 |
| — |
| 390,783 | |
June 1—June 30, 2022 |
| 60,497 |
| 22.62 |
| — |
| 330,286 |
| (1) | In May 2009, the board of directors of our general partner authorized the repurchase of our common units for the purpose of meeting our general partner’s anticipated obligations to deliver common units under the Long-Term Incentive Plan (“LTIP”) and meeting the general partner’s obligations under existing employment agreements and other employment related obligations of the general partner. Our general partner is currently authorized to acquire up to 1,437,427 of our common units in the aggregate over an extended period of time, consistent with the general partner’s obligations under the LTIP and employment agreements. 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, economic and market conditions, applicable legal requirements and available liquidity. |
Item 6.Exhibits
| (a) | Exhibits |
2.1** | — | |||||
3.1 | — | |||||
3.2 | — | |||||
4.1 | — | |||||
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4.2 | — | |||||
4.3 | — | |||||
4.4 | — | |||||
— | ||||||
— | ||||||
— | ||||||
— | ||||||
— | ||||||
— | ||||||
10.7* | — | |||||
10.8* | — | |||||
31.1* | — | |||||
31.2* | — | |||||
32.1† | — | |||||
32.2† | — | |||||
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.DEF* | — | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
101.LAB* | — | Inline XBRL Taxonomy Extension Labels Linkbase Document. | ||||
101.PRE* | — | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
104* | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith.
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** Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Partnership undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.
† Not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section.
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SIGNATURES
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.
GLOBAL PARTNERS LP | ||||
By: | Global GP LLC, | |||
its general partner | ||||
Dated: August 5, 2022 | By: | /s/ Eric Slifka | ||
Eric Slifka | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: August 5, 2022 | By: | /s/ Gregory B. Hanson | ||
Gregory B. Hanson | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
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