GLOBAL PARTNERS LP The following discussion and analysis of financial condition and results of
operations of
Forward-Looking Statements Some of the information contained in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words "may," "believe," "should," "could," "expect," "anticipate," "plan," "intend," "estimate," "continue," "will likely result," or other similar expressions. In addition, any statement made by our management concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions by us are also forward-looking statements. Forward-looking statements are not guarantees of performance. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks, many of which are beyond our control, which may cause future results to be materially different from the results stated or implied in this document. These risks and uncertainties include, among other things:
· We may not have sufficient cash from operations to enable us to pay
distributions on our Series A Preferred Units 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.
· The outbreak of COVID-19 and certain developments in global oil markets have
had, and may continue to have, material adverse consequences for general
economic, financial and business conditions, and could materially and adversely
affect our business, financial condition and results of operation and those of
our customers, suppliers and other counterparties.
· 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 that adversely impact the
market for transporting these products by rail or otherwise could adversely
affect those activities. In addition, implementation of regulations and
directives related to these aforementioned services as well as a 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.
· 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, which has resulted and could continue to
result in a decrease in the utilization of our transportation assets, could
negatively impact our financial condition, results of operations and cash
available for distribution to our unitholders.
· 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.
· Erosion of the value of major gasoline brands could adversely affect our
gasoline sales and customer traffic.
· Our gasoline sales could be significantly reduced by a reduction in demand due
to higher prices and to new technologies and alternative fuel sources, such as
electric, hybrid, battery powered, hydrogen or other alternative fuelpowered
motor vehicles. Changing consumer preferences or driving habits could lead to
new forms of
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fueling destinations or potentially fewer customer visits to our sites,
resulting in a decrease in gasoline sales and/or sales of food, sundries and
other on-site services. Any of these outcomes could negatively affect our
financial condition, results of operations and cash available for distribution
to our unitholders.
· Physical effects from climate change and impacts to areas prone to sea level
rise or other extreme weather events could have the potential to adversely
affect our assets and operations.
· 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.
· Our petroleum and related products sales, logistics activities and results of
operations have been and could continue to be adversely affected by, among
other things, changes in the petroleum products market structure, product
differentials and volatility (or lack thereof), implementation of regulations
that adversely impact the market for transporting petroleum and related
products by rail and other modes of transportation, severe weather conditions,
significant changes in prices and interruptions in transportation services and
other necessary services and equipment, such as railcars, barges, trucks,
loading equipment and qualified drivers.
· Our risk management policies cannot eliminate all commodity risk, basis risk or
the impact of unfavorable market conditions, each of which can adversely affect
our financial condition, results of operations and cash available for
distribution to our unitholders. In addition, noncompliance with our risk
management policies could result in significant financial losses.
· Our results of operations are affected by the overall forward market for the
products we sell, and pricing volatility may adversely impact our results.
· Our businesses could be affected by a range of issues, such as changes in
commodity prices, energy conservation, competition, the global economic
climate, movement of products between foreign locales and within the United
States, changes in refiner demand, weekly and monthly refinery output levels,
changes in local, domestic and worldwide inventory levels, changes in health,
safety and environmental regulations, including, without limitation, those
related to climate change, failure to obtain renewal permits on terms favorable
to us, seasonality, supply, weather and logistics disruptions and other factors
and uncertainties inherent in the transportation, storage, terminalling and
marketing of refined products, gasoline blendstocks, renewable fuels and crude
oil.
· Increases and/or decreases in the prices of the products we sell could
adversely impact the amount of availability for borrowing working capital under
our credit agreement, which credit agreement has borrowing base limitations and
advance rates.
· Warmer weather conditions could adversely affect our home heating oil and
residual oil sales. Our sales of home heating oil and residual oil continue to
be reduced by conversions to natural gas and by utilization of propane and/or
natural gas (instead of heating oil) as primary fuel sources.
· We are exposed to trade credit risk and risk associated with our trade credit
support in the ordinary course of our businesses.
· The condition of credit markets may adversely affect our liquidity.
· 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.
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· Our gasoline station and convenience store business, including with the onset
of the COVID-19 pandemic, 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.
·
regulate tobacco and nicotine products, and the FDA and states 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 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 vapor products and
e-cigarettes 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 results can be adversely affected by unforeseen events, such as adverse
weather, natural disasters, terrorism, pandemics, or other catastrophic events
which could have an adverse effect on our financial condition, results of
operations and cash available for distributions 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.
· Adverse developments in the areas where we conduct our businesses could have a
material adverse effect on such businesses and could reduce our ability to make
distributions to our unitholders.
· A serious disruption to our information technology systems could significantly
limit our ability to manage and operate our businesses efficiently.
· We are exposed to performance risk in our supply chain.
· Our businesses are subject to federal, state and municipal environmental and
non-environmental regulations which could have a material adverse effect on
such businesses.
· Our general partner and its affiliates have conflicts of interest and limited
fiduciary duties, which could permit them to favor their own interests to the
detriment of our unitholders.
· Unitholders have limited voting rights and are not entitled to elect our
general partner or its directors or remove our general partner without the
consent of the holders of at least 66 2/3% of the outstanding common units
(including common units held by our general partner and its affiliates), which
could lower the trading price of our units.
· Our tax treatment depends on our status as a partnership for federal income tax
purposes.
· Unitholders may be required to pay taxes on their share of our income even if
they do not receive any cash distributions from us.
Additional information about risks and uncertainties that could cause actual
results to differ materially from forward-looking statements is contained in
Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year
ended December 31, 2019 and Part II, Item 1A, "Risk Factors," in this Quarterly
Report on Form 10-Q.
We expressly disclaim any obligation or undertaking to update these statements
to reflect any change in our expectations or beliefs or any change in events,
conditions or circumstances on which any forward-looking statement is based,
other than as required by federal and state securities laws. All forward-looking
statements included in this Quarterly Report on Form 10-Q and all subsequent
written or oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these cautionary
statements.
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Overview
General
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
March 31, 2020 , we had a portfolio of 1,536 owned, leased and/or supplied
gasoline stations, including 283 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 midcontinent region
of the United States and Canada .
Collectively, we sold approximately $2.5 billion of refined petroleum products,
gasoline blendstocks, renewable fuels, crude oil and propane for the three
months ended March 31, 2020 . In addition, we had other revenues of approximately
$0.1 billion for the three months ended March 31, 2020 from convenience store
sales at our directly operated stores, rental income from dealer leased and
commissioned agent leased gasoline stations and from cobranding arrangements,
and sundries.
We base our pricing on spot prices, fixed prices or indexed prices and routinely
use the New York Mercantile Exchange ("NYMEX"), Chicago Mercantile Exchange
("CME") and Intercontinental Exchange ("ICE") or other counterparties to hedge
the risk inherent in buying and selling commodities. Through the use of
regulated exchanges or derivatives, we seek to maintain a position that is
substantially balanced between purchased volumes and sales volumes or future
delivery obligations.
Our Perspective on Global and the COVID-19 Pandemic
Overview In the second half ofMarch 2020 , the COVID-19 pandemic made its presence felt at home, in the office workplace and at our retail sites and terminal locations. We have successfully executed our business continuity plans. Today, some eight weeks later, we remain active in responding to the challenges posed by the COVID-19 pandemic and continue to provide essential products and services while prioritizing the safety of our employees, customers and vendors in the communities where we operate. The COVID-19 pandemic has resulted in an economic downturn and greatly restricted travel to, from and within the states in which we conduct our businesses. Federal, state and municipal "stay at home" or similar-like directives have resulted in significant decreases in the demand for gasoline and convenience store products. Social distancing guidelines and directives limiting food operations at our convenience stores have further contributed to a reduction in in-store traffic and sales. The demand for diesel fuel has similarly (but not as drastically) been impacted. From mid-March into April, we saw reductions of more than 50% in gasoline volume and more than 20% in convenience store sales. Our Response to the Pandemic
We have taken numerous operational and financial steps to address this challenging environment. We remain well positioned to pivot and address different (and, at times, conflicting) directives from federal, state and municipal authorities designed to mitigate the spread of the COVID-19 pandemic, permit the opening of businesses and promote an economic recovery.
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Operational Response
In mid-March 2020 , we mandated all our office workers to work remotely, with the
exception of a small skeletal team to handle discrete essential duties. Working
remotely has been successfully implemented and has long-term bandwidth.
At our stations, stores and terminals, responses and activities include the following:
· Compliance with federal, state and municipal directives; · Provided gloves and masks for employees;
· Installed plexiglass shields at registers, and established 6 foot pre-printed
floor markings;
· Provided gloves inside our stores to customers for use at fuel dispensers;
· Sent notice to vendors and contractors regarding our COVID-19 procedures and
exposure reporting requirements;
· Developed detailed procedures for responses to known or suspected cases of
COVID-19 including deep-cleaning of areas of known or suspected COVID-19
exposure;
· Provided guidance and postings for terminal operators for social distancing,
mask use, disinfection standards and management of visitors, customers and
vendors;
· Implemented procedures to exclude truck drivers from terminal operator areas;
· Modified vessel receipt and loading/unloading procedures.
Financial Response: Liquidity and Related Matters
With respect to providing additional financial flexibility in this uncertain environment, recent steps taken include:
· On
quarterly cash distribution from
outstanding common units.
· In late March, we borrowed
which is included in cash on the balance sheet.
· On
with temporary covenant adjustments for four (4) quarters starting
2020, with (a) an increase in combined total leverage ratio and (b) a reduction
in combined interest coverage ratio.
· As part of the above-mentioned amendment to our credit agreement, we
voluntarily reduced the revolving credit facility to
· Reduced planned expenses and reduced 2020 capital spending, with 2020
maintenance capital expenditures are now estimated at approximately
previously) and 2020 expansion capital expenditures estimated at
to
· Under the CARES Act, recognition of a tax benefit in connection with the
carryback of losses for which we expect to receive cash refunds of
approximately $15.8 million .
Our First Quarter 2020 Performance
Since early March, the COVID-19 pandemic-related demand destruction and the price war betweenSaudi Arabia andRussia caused a rapid decline in fuel prices. The price of crude (WTI) fell from$46.75 /barrel onMarch 2, 2020 to$20.48 /barrel onMarch 31, 2020 . Similarly, the price of wholesale gasoline (87 RBOB) on the NYMEX fell from$1.54 /gallon to$0.57 /gallon during the same timeframe, steepening the forward product pricing curve. During the first quarter of 2020, this decline in prices had a positive impact on fuel margin in our GDSO segment, but a negative impact on the product margins in our Wholesale segment.
In our GDSO segment, gasoline distribution product margin increased
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product margins decreased $29.9 million year over year, due to less favorable
market conditions including the steepening forward product pricing curve caused
by the rapid decline in prices.
Moving Forward - Our Perspective
In April, we continued to experience a decline in transportation fuels volumes and convenience store sales. Fuel margins (cents per gallon) in our GDSO segment also declined but remain strong. Over the past few weeks, we have seen a slight uptick in volume and convenience store sales. We could reasonably expect volumes and sales to continue to increase as more of the economy "re-opens" and more people travel. Some states in which we operate have announced programs to lift, in part, restrictions on travel and to allow non-essential businesses to open (with restrictions) to promote economic recovery. However, the extent to which the COVID-19 pandemic negatively affects our operating results is and remains uncertain. The outbreak of the COVID-19 pandemic and changing developments in global oil markets have had, and may continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition and results of operations and those of our customers, suppliers and other counterparties. Our inventory management is dependent on the use of hedging instruments which are managed based on the structure of the forward pricing curve. Daily market changes may impact periodic results due to the point-in-time valuation of these positions. Volatility in the current oil markets resulting from COVID-19 and geopolitical events may impact our results. Business operations today, as compared to how we conducted our business in early March, reflect changes which may well remain for an indefinite period of time. We expect an increase in costs to comply with both governmental directives and other voluntary measures adopted by us to support the safety of our employees, customers and vendors. Despite the steep decline in commodity prices, uncertainties surrounding the duration of the COVID-19 pandemic and the decline in demand at the pump and inside our stores, terminals, gasoline stations and convenience stores remain open, continuing to provide essential products and services. In these uncertain times and volatile markets, we believe that we are operationally nimble and that our portfolio of assets may provide us with opportunities. By example, our excess storage capacity in our terminal network positions us to take advantage of the contango environment resulting from the steepening forward product pricing curve. Recent Event Amended Credit Agreement-OnMay 7, 2020 , we and certain of our subsidiaries entered into the fourth amendment to third amended and restated credit agreement which, among other things, provides temporary adjustments to certain covenants and reduces the total aggregate commitment by$130.0 million . See "-Liquidity and Capital Resources-Credit Agreement." Operating Segments We purchase refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane primarily from domestic and foreign refiners and ethanol producers, crude oil producers, major and independent oil companies and trading companies. We operate our businesses under three segments: (i) Wholesale, (ii) Gasoline Distribution and Station Operations ("GDSO") and (iii) Commercial. 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 ofthe United States andCanada , transport it by rail and ship it by barge to refiners. We sell home heating oil, branded and unbranded gasoline and gasoline blendstocks, diesel, kerosene, residual oil and propane to home heating oil and propane retailers and wholesale distributors. Generally, 50 Table of Contents 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"). OurU.S. Environmental Protection Agency ("EPA ") obligations relative to renewable fuel reporting are comprised of foreign gasoline and diesel that we may import and blending operations at certain facilities.
Gasoline Distribution and Station Operations
In our GDSO segment, gasoline distribution includes sales of branded and unbranded gasoline to gasoline station operators and sub-jobbers. Station operations include (i) convenience stores, (ii) rental income from gasoline stations leased to dealers, from commissioned agents and from cobranding arrangements and (iii) sundries (such as car wash sales and lottery and ATM commissions).
As ofMarch 31, 2020 , we had a portfolio of owned, leased and/or supplied gasoline stations, primarily in the Northeast, that consisted of the following: Company operated 283 Commissioned agents 258 Lessee dealers 214 Contract dealers 781 Total 1,536 At our companyoperated stores, we operate the gasoline stations and convenience stores with our employees, and we set the retail price of gasoline at the station. At commissioned agent locations, we own the gasoline inventory, and we set the retail price of gasoline at the station and pay the commissioned agent a fee related to the gallons sold. We receive rental income from commissioned agent leased gasoline stations for the leasing of the convenience store premises, repair bays and other businesses that may be conducted by the commissioned agent. At dealerleased 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) dealerleased gasoline stations and (ii) cobranding arrangements. We also supply gasoline to locations owned and/or leased by independent contract dealers. Additionally, we have contractual relationships with distributors in certainNew England states pursuant to which we source and supply these distributors' gasoline stations with ExxonMobilbranded 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. Travel and recreational activities are typically higher in these months in the geographic areas in which we operate, increasing 51
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the demand for gasoline. Therefore, our volumes in gasoline are typically higher in the second and third quarters of the calendar year. However, the COVID-19 pandemic has had a significantly negative impact on gasoline demand and the extent and duration of that impact is uncertain. As demand for some of our refined petroleum products, specifically home heating oil and residual oil for space heating purposes, is generally greater during the winter months, heating oil and residual oil volumes are generally higher during the first and fourth quarters of the calendar year. These factors may result in fluctuations in our quarterly operating results. Outlook This section identifies certain risks and certain economic or industry-wide factors, in addition to those described under "-Our Perspective on Global and the COVID-19 Pandemic," that may affect our financial performance and results of operations in the future, both in the short-term and in the long-term. Our results of operations and financial condition depend, in part, upon the following:
· 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 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. 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. In addition, we may consummate transactions that at the time of
consummation we believe will be accretive but that
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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 requiring 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, with particular impact to our GDSO segment, are
seasonal and can be lower in the first and fourth quarters of the calendar
year. Due to the nature of our businesses and our reliance, in part, on
consumer travel and spending patterns, we may experience more demand for
gasoline during the late spring and summer months than during the fall and
winter. Travel and recreational activities are typically higher in these months
in the geographic areas in which we operate, increasing the demand for gasoline
that we sell. Therefore, our results of operations in gasoline can be lower in
the first and fourth quarters of the calendar year. The COVID-19 pandemic has
had a significantly negative impact on gasoline demand and the extent and
duration of that impact is uncertain.
· Our heating oil and residual oil financial results are seasonal and 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. Therefore, our results of operations in heating oil
and residual oil for the first and fourth calendar quarters can be better than
for the second and third quarters.
· 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. Therefore, our results of operations in
heating oil and residual oil for the first and fourth calendar quarters can be
better than for the second and third quarters.
· Energy efficiency, higher prices, new technology and alternative fuels could
reduce demand for our products.
Higher prices and new technologies and alternative fuel sources, such as electric, hybrid or battery powered motor vehicles, could reduce the demand for transportation fuels and adversely impact our sales of transportation fuels.
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A reduction in sales of transportation fuels could have an adverse effect on our
financial condition, results of operations and cash available for distribution
to our unitholders. In addition, increased conservation and technological
advances have adversely affected the demand for home heating oil and residual
oil. Consumption of residual oil has steadily declined over the last three
decades. We could face additional competition from alternative energy sources as
a result of future government-mandated controls or regulations further promoting
the use of cleaner fuels. End users who are dual-fuel users have the ability to
switch between residual oil and natural gas. Other end users may elect to
convert to natural gas. During a period of increasing residual oil prices
relative to the prices of natural gas, dual-fuel customers may switch and other
end users may convert to natural gas. During periods of increasing home heating
oil prices relative to the price of natural gas, residential users of home
heating oil may also convert to natural gas. As described above, such switching
or conversion could have an adverse effect on our financial condition, results
of operations and cash available for distribution to our unitholders.
· 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
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
assigned to each gallon of renewable fuel produced in or imported into the
cannot predict the future prices of RINs. RIN prices are dependent upon a
variety of factors, including
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
adversely affected. Future demand for ethanol will be largely dependent upon
the economic incentives to blend based upon the relative value of gasoline and
ethanol, taking into consideration the
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.
· We may not be able to fully implement or capitalize upon planned growth
projects. We could have a number of organic growth projects that may require
the expenditure of significant amounts of capital in the aggregate. Many of
these projects involve numerous regulatory, environmental, commercial and legal
uncertainties beyond our control. As these projects are undertaken, 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. Moreover, revenues associated with these organic
growth projects may not increase immediately upon the expenditures of funds
with respect to a particular project and these projects may be completed behind
schedule or in excess of budgeted cost. We may pursue and complete projects in
anticipation of market demand that dissipates or market growth that never
materializes. As a result of these uncertainties, the anticipated benefits
associated with our capital projects may not be achieved.
· Governmental action and campaigns to discourage smoking and use of other
products may have a material adverse effect on our revenues and gross
profit.
nicotine products, and the FDA and states 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 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 vapor products and e-cigarettes 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
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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. 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. In recent years, the transport of crude oil and ethanol has become
subject to additional regulation. The establishment of more stringent design or
construction standards, or other requirements for railroad tank cars that are
used to transport crude oil and ethanol with too short of a timeframe for
compliance may lead to shortages of compliant railcars available to transport
crude oil and ethanol, which could adversely affect our businesses. Likewise,
in recent years, efforts have commenced to seek to use federal, state and
municipal laws to contest issuance of permits, contest renewal of permits and
restrict the types of railroad tanks cars that can be used to deliver products,
including, without limitation, crude oil and ethanol to bulk storage
terminals. Were such laws to come into effect and were they to survive appeals
and judicial review, they would potentially expose our operations to
duplicative and possibly inconsistent regulation. 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 ("SG&A"), (6) operating expenses and (7) degree days.
Product Margin
We view product margin as an important performance measure of the core
profitability of our operations. We review product margin monthly for
consistency and trend analysis. We define product margin as our product sales
minus product costs. Product sales primarily include sales of unbranded and
branded gasoline, distillates, residual oil, renewable fuels, crude oil and
propane, as well as convenience store sales, gasoline station rental income and
revenue generated from our logistics activities when we engage in the storage,
transloading and shipment of products owned by others. Product costs include the
cost of acquiring products and all associated costs including shipping and
handling costs to bring such products to the point of sale as well as product
costs related to convenience store items and costs associated with our logistics
activities. We also look at product margin on a per unit basis (product margin
divided by volume). Product margin is a non-GAAP financial measure used by
management and external users of our consolidated financial statements to assess
our business. Product margin should not be considered an alternative to net
income, operating income, cash flow from operations, or any other measure of
financial performance presented in accordance
55Table of Contents
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 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.
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Distributable cash flow should not be considered as an alternative to net income, operating income, cash flow from operations, or any other measure of financial performance presented in accordance with GAAP. In addition, our distributable cash flow may not be comparable to distributable cash flow or similarly titled measures of other companies.
Selling, General and Administrative Expenses
Our SG&A expenses include, among other things, marketing costs, corporate overhead, employee salaries and benefits, pension and 401(k) plan expenses, discretionary bonuses, non-interest financing costs, professional fees and information technology expenses. Employee-related expenses including employee salaries, discretionary bonuses and related payroll taxes, benefits, and pension and 401(k) plan expenses are paid by our general partner which, in turn, are reimbursed for these expenses by us. Operating Expenses Operating expenses are costs associated with the operation of the terminals, transload facilities and gasoline stations and convenience stores used in our businesses. Lease payments, maintenance and repair, property taxes, utilities, credit card fees, taxes, labor and labor-related expenses comprise the most significant portion of our operating expenses. While the majority of these expenses remains relatively stable, independent of the volumes through our system, they can fluctuate slightly depending on the activities performed during a specific period. In addition, they can be impacted by new directives issued by federal, state and local governments. Degree Days A "degree day" is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average temperature departs from a human comfort level of 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a long-term (multi-year) average, or normal, to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by theNational Weather Service and officially archived by theNational Climatic Data Center . For purposes of evaluating our results of operations, we use the normal heating degree day amount as reported by theNational Weather Service at itsLogan International Airport station inBoston, Massachusetts . 57 Table of Contents
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
March 31,
2020 2019
Net income attributable to Global Partners LP $ 3,276 $ 7,126
EBITDA (1) $ 44,676 $ 58,041
Adjusted EBITDA (1) $ 45,419 $ 58,594
Distributable cash flow (2)(3) $ 21,985 $ 27,760
Wholesale Segment:
Volume (gallons) 999,312 1,007,900
Sales
Gasoline and gasoline blendstocks $ 898,457 $ 1,005,705
Crude oil (4) 6,453
13,993
Other oils and related products (5) 582,568
689,508
Total$ 1,487,478 $
1,709,206
Product margin Gasoline and gasoline blendstocks$ 9,144 $
26,990
Crude oil (4) (4,470)
(6,226)
Other oils and related products (5) 210
14,080
Total$ 4,884 $
34,844
Gasoline Distribution and Station Operations Segment: Volume (gallons) 351,422 379,734 Sales Gasoline$ 745,615 $ 830,172 Station operations (6) 98,626 104,659 Total$ 844,241 $ 934,831 Product margin Gasoline$ 107,230 $ 87,425 Station operations (6) 48,641 50,960 Total$ 155,871 $ 138,385 Commercial Segment: Volume (gallons) 163,250 191,506 Sales$ 263,374 $ 335,589 Product margin$ 5,915 $ 6,458 Combined sales and product margin: Sales$ 2,595,093 $
2,979,626
Product margin (7)$ 166,670 $
179,687
Depreciation allocated to cost of sales (20,932)
(22,843)
Combined gross profit$ 145,738 $
156,844
GDSO portfolio as of March 31, 2020 and 2019: 2020 2019
Company operated 283 296
Commissioned agents 258 254
Lessee dealers 214 230
Contract dealers 781 798
Total GDSO portfolio 1,536 1,578
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Three Months Ended
March 31,
2020 2019
Weather conditions:
Normal heating degree days 2,870 2,870
Actual heating degree days 2,321
2,724
Variance from normal heating degree days (19) % (5) % Variance from prior period actual heating degree days (15) % - %
--------------------------------------------------------------------------------
(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) Distributable cash flow includes a net loss on sale and disposition of assets
of
and 2019, respectively. Excluding this charge, distributable cash flow would
have been
(4) Crude oil consists of our crude oil sales and revenue from our logistics
activities.
(5) Other oils and related products primarily consist of distillates, residual
oil and propane.
(6) Station operations consist of convenience stores sales, rental income and
sundries.
(7) 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
March 31,
2020 2019Reconciliation of net income to EBITDA and Adjusted EBITDA: Net income
$ 3,075 $ 6,794 Net loss attributable to noncontrolling interest 201
332
Net income attributable toGlobal Partners LP 3,276
7,126
Depreciation and amortization, excluding the impact of noncontrolling interest
25,668 27,935
Interest expense, excluding the impact of noncontrolling interest 21,601 22,956 Income tax (benefit) expense (5,869) 24 EBITDA 44,676 58,041 Net loss on sale and disposition of assets 743
553
Adjusted EBITDA$ 45,419
Reconciliation of net cash provided by (used in) operating activities to EBITDA and Adjusted EBITDA: Net cash provided by (used in) operating activities
$ 137,917
(109,067) 122,036
Net cash from operating activities and changes in operating assets and liabilities attributable to noncontrolling interest
94 62
Interest expense, excluding the impact of noncontrolling interest 21,601 22,956 Income tax (benefit) expense (5,869) 24 EBITDA 44,676 58,041 Net loss on sale and disposition of assets 743 553 Adjusted EBITDA$ 45,419 $ 58,594 60 Table of Contents 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): March 31, 2020 2019
Reconciliation of net income to distributable cash flow: Net income
$ 3,075 $ 6,794 Net loss attributable to noncontrolling interest 201
332
Net income attributable toGlobal Partners LP 3,276
7,126
Depreciation and amortization, excluding the impact of noncontrolling interest
25,668 27,935
Amortization of deferred financing fees and senior notes discount
1,261 1,727
Amortization of routine bank refinancing fees (940)
(1,022)
Maintenance capital expenditures, excluding the impact of noncontrolling interest
(7,280) (8,006)
Distributable cash flow (1)(2) 21,985
27,760
Distributions to Series A preferred unitholders (3) (1,682)
(1,682)
Distributable cash flow after distributions to Series A preferred unitholders
$ 20,303
Reconciliation of net cash provided by (used in) operating activities to distributable cash flow: Net cash provided by (used in) operating activities
$ 137,917
(109,067) 122,036
Net cash from operating activities and changes in operating 94
62
assets and liabilities attributable to noncontrolling interest Amortization of deferred financing fees and senior notes discount
1,261 1,727
Amortization of routine bank refinancing fees (940)
(1,022)
Maintenance capital expenditures, excluding the impact of noncontrolling interest
(7,280) (8,006)
Distributable cash flow (1)(2) 21,985
27,760
Distributions to Series A preferred unitholders (3) (1,682)
(1,682)
Distributable cash flow after distributions to Series A preferred unitholders
$ 20,303
--------------------------------------------------------------------------------
(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 loss on sale and disposition of assets
of
and 2019, respectively. Excluding this charge, distributable cash flow would
have been
(3) Distributions to Series A preferred unitholders represent the distributions
payable to the preferred unitholders during the period. Distributions on the
Series A Preferred Units are cumulative and payable quarterly in arrears on
February 15 ,May 15 ,August 15 andNovember 15 of each year. Results of Operations Consolidated Sales Our total sales were$2.6 billion and$3.0 billion for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.4 billion , or 13%, primarily due to a decrease in prices. Our aggregate volume of product sold was 1.5 billion gallons and 1.6 billion gallons for the three months endedMarch 31, 2020 and 2019, respectively, declining by 65 million gallons including decreases of 28 million gallons, 28 million gallons and 9 million gallons in our GDSO, Commercial and Wholesale segments, respectively. Gross Profit Our gross profit was$145.7 million and$156.8 million for three months endedMarch 31, 2020 and 2019, respectively, a decrease of$11.1 million , or 7%, primarily due to less favorable market conditions in our Wholesale segment in part due to geopolitical events and the COVID-19 pandemic, offset by higher fuel margins (cents per gallon) in our GDSO segment. 61 Table of Contents
Results for Wholesale Segment
Gasoline and Gasoline Blendstocks. Sales from wholesale gasoline and gasoline blendstocks were$0.9 billion and$1.0 billion for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.1 billion , or 10%, due to a decrease in prices. Our gasoline and gasoline blendstocks product margin was$9.1 million and$27.0 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$17.9 million , or 66%, primarily due to less favorable market conditions in gasoline compared to the same period in 2019. InMarch 2020 , the COVID-19 pandemic and the price war betweenSaudi Arabia andRussia caused a rapid decline in prices, steepening the forward product pricing curve, which negatively impacted margins in the quarter. In contrast, during the first quarter of 2019, our product margin in gasoline benefitted from tight supply due in part to planned and unplanned refinery outages. Crude Oil. Crude oil sales and logistics revenues were$6.5 million and$14.0 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$7.5 million , or 54%, due to decreases in prices and in volume sold. Our crude oil product margin was ($4.4 million ) and ($6.2 million ) for the three months endedMarch 31, 2020 and 2019, respectively, improving by$1.8 million , or 29%, in part due to lower railcar related expenses. Other Oils and Related Products. Sales from other oils and related products (primarily distillates, residual oil and propane) were$0.6 billion and$0.7 billion for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.1 billion , or 15%, primarily due to a decrease in prices. Our product margin from other oils and related products was$0.2 million and$14.1 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$13.9 million , or 98%, primarily due to less favorable market conditions, largely in residual oil, but also in distillates as the COVID-19 pandemic and geopolitical events caused a rapid decline in prices, steepening the forward product pricing curve, which negatively impacted margins in the quarter. In addition, our product margin in other oils and related products was negatively impacted due to significantly warmer weather during the first quarter 2020 compared to the same period in 2019. Temperatures in the first quarter of 2020 were 19% warmer than normal and 15% warmer than the first quarter of 2019.
Results for Gasoline Distribution and Station Operations Segment
Gasoline Distribution. Sales from gasoline distribution were$0.7 billion and$0.8 billion for the three months endedMarch 31, 2020 and 2019, respectively, decreasing$84.6 million , or 10%, due to decreases in prices and in volume sold in part due to the impact of the COVID-19 pandemic. Our product margin from gasoline distribution was$107.2 million and$87.4 million for the three months endedMarch 31, 2020 and 2019, respectively, an increase of$19.8 million , or 23%, due to higher fuel margins (cents per gallon). Wholesale gasoline prices declined during the quarter, primarily in March due to the COVID-19 pandemic and geopolitical events. Declining wholesale gasoline prices can improve our gasoline product margin, the extent of which depends on the magnitude and duration of the decline. Station Operations. Our station operations, which include (i) convenience stores sales at our directly operated stores, (ii) rental income from gasoline stations leased to dealers or from commissioned agents and from cobranding arrangements and (iii) sale of sundries, such as car wash sales and lottery and ATM commissions, collectively generated revenues of$98.6 million and$104.6 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$6.0 million , or 6%. Our product margin from station operations was$48.6 million and$51.0 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$2.4 million , or 5%. The decreases in sales and product margin are primarily due to less activity at our convenience stores attributable in part to the impact of the COVID-19 pandemic.
Results for Commercial Segment
Our commercial sales were$263.4 million and$335.6 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$72.2 million , or 21%, due to decreases in prices and in volume sold. Our commercial product margin was$5.9 million and$6.4 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.5 million , or 8%. 62 Table of Contents
Selling, General and Administrative Expenses
SG&A expenses were$40.9 million and$41.1 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.2 million , including decreases of$2.5 million in incentive compensation and$0.5 million in professional fees, offset by increases of$1.3 million in wages and benefits and$1.5 million in various other SG&A expenses, primarily related to our GDSO operations. Operating Expenses Operating expenses were$82.5 million and$82.9 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$0.4 million , including decreases of$0.3 million associated with our terminal operations and$0.1 million associated with our GDSO operations.
Lease Exit and Termination Gain
During the three months endedMarch 31, 2019 , we were released from certain of our remaining obligations to provide future railcar storage, freight, insurance and other services for railcars under a fleet management services agreement associated with our 2016 voluntary termination of a railcar sublease. The release of certain obligations resulted in a$0.5 million reduction of the remaining accrued incremental costs, which benefit is included in lease exit and termination gain in the accompanying statement of operations for the three months endedMarch 31, 2019 . Amortization Expense
Amortization expense related to intangible assets was
Net Loss on Sale and Disposition of Assets
Net loss on sale and disposition of assets was$0.7 million and$0.5 million for the three months endedMarch 31, 2020 and 2019, respectively, primarily due to the sale of GDSO sites. Interest Expense Interest expense was$21.6 million and$22.9 million for the three months endedMarch 31, 2019 , respectively, a decrease of$1.3 million , or 6%, due to lower average balances on our credit facilities and lower interest rates. Income Tax Benefit (Expense) Income tax benefit was$5.9 million for the three months endedMarch 31, 2020 , consisting of an income tax benefit of$6.3 million (discussed below), offset by an income tax expense of ($0.4 million ) which reflects the income tax expense from the operating results of GMG, which is a taxable entity for federal and state income tax purposes. The income tax for the three months endedMarch 31, 2019 was immaterial. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted and signed into law. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides certain tax changes in response to the COVID-19 pandemic, including the temporary removal of certain limitations on the utilization of net operating losses, permitting the carryback of net operating losses generated in 2018, 2019 or 2020 to the five preceding taxable years, increasing the ability to deduct interest expense, deferring the employer share of social security tax payments, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As a result, we recognized a benefit of$6.3 million related to the CARES Act net operating loss carryback provisions which is included in income tax benefit in the accompanying statement of operations for the three months endedMarch 31, 2020 . We expect to receive cash refunds totaling$15.8 million associated with the carryback of losses 63
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generated in 2018 to the 2016 and 2017 tax years, and this income tax receivable is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet as ofMarch 31, 2020 .
Net Loss Attributable to Noncontrolling Interest
InFebruary 2013 , we acquired a 60% membership interest in Basin Transload. The net loss attributable to the noncontrolling interest was$0.2 million and$0.3 million for the three months endedMarch 31, 2020 and 2019, respectively, which represents the 40% noncontrolling ownership of the net loss reported.
Liquidity and Capital Resources
Liquidity
Our primary liquidity needs are to fund our working capital requirements, capital expenditures and distributions and to service our indebtedness. Our primary sources of liquidity are cash generated from operations, amounts available under our working capital revolving credit facility and equity and debt offerings. Please read "-Credit Agreement" for more information on our working capital revolving credit facility.
Given the uncertainty surrounding the short-term and long-term impact of COVID-19, including the timing of an economic recovery, we have taken certain steps to increase liquidity and create additional financial flexibility. Such steps include a 25% decrease to our quarterly distribution on our common units for the period fromJanuary 1, 2020 toMarch 31, 2020 . In addition, we borrowed$50.0 million under our revolving credit facility which is included in cash on our balance sheet. We have reduced planned expenses and 2020 capital spending. We amended our credit agreement to provide temporary adjustments to certain covenants. We believe that our current level of cash and borrowing capacity under our credit agreement will be sufficient to meet our liquidity needs. Working capital was$309.5 million and$250.6 million atMarch 31, 2020 andDecember 31, 2019 , respectively, an increase of$58.9 million , primarily due to a$42.3 million increase in cash as we borrowed$50.0 million under our revolving credit facility in response to the uncertainty caused by the COVID-19 pandemic. Other changes in current assets and current liabilities increasing working capital include (i) decreases of$227.7 million in accounts payable,$115.0 million in the current portion of our working capital revolving credit facility and$32.3 million in accrued expenses and other current liabilities, primarily due to lower prices, and (ii) an increase of$76.6 million in derivatives, for a total increase in working capital of$493.9 million , including the increase in cash. The increase in working capital was offset by decreases of$236.1 million in inventories and$223.2 million in accounts receivable, also primarily due to lower prices. Cash Distributions Common Units During 2020, we paid the following cash distribution to our common unitholders and our general partner: Distribution Paid for the Cash Distribution Payment Date Total Paid Quarterly Period Ended February 14, 2020$ 18.3 million Fourth quarter 2019 In addition, onApril 27, 2020 , given the uncertainty surrounding the impact of COVID-19, the Board of Directors of our general partner declared a reduced quarterly cash distribution of$0.39375 per unit ($1.5750 per unit on an annualized basis) on all of our outstanding common units for the period fromJanuary 1, 2020 throughMarch 31, 2020 to our common unitholders of record as of the close of businessMay 11, 2020 . We expect to pay the total cash distribution of approximately$13.5 million onMay 15, 2020 . 64 Table of Contents Preferred Units During 2020, we paid the following cash distributions to holders of the Series A Preferred Units: Distribution Paid for the Cash Distribution Payment Date Total Paid Quarterly Period Covering November 15, 2019 - February February 18, 2020$ 1.7 million 14, 2020 In addition, onApril 16, 2020 , the Board of Directors of our general partner declared a quarterly cash distribution of$0.609375 per unit ($2.4375 per unit on an annualized basis) on our Series A Preferred Units for the period fromFebruary 15, 2020 throughMay 14, 2020 to our preferred unitholders of record as of the opening of business onMay 1, 2020 . We expect to pay the total cash distribution of approximately$1.7 million onMay 15, 2020 . Contractual Obligations We have contractual obligations that are required to be settled in cash. The amounts of our contractual obligations atMarch 31, 2020 were as follows (in thousands): Payments Due by Period Remainder of 2024 and Contractual Obligations 2020 2021 2022 2023 Thereafter Total Credit facility obligations (1)$ 37,316 $ 312,614 $ 133,035 $ - $ -$ 482,965 Senior notes obligations (2) 35,000 49,000 49,000 338,500 512,000 983,500 Operating lease obligations (3) 65,583 80,540 54,576 42,071 112,769 355,539 Other long-term liabilities (4) 22,493 26,750 21,941 13,259 50,202 134,645 Financing obligations (5) 11,103 15,016 15,261 15,510 97,874 154,764 Total$ 171,495 $ 483,920 $ 273,813 $ 409,340 $ 772,845 $ 2,111,413
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(1) Includes principal and interest on our working capital revolving credit
facility and our revolving credit facility at
ratable payment through the expiration date. Our credit agreement has a
contractual maturity of
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
2019 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 15-year brand fee agreement entered into in
2010 with ExxonMobil and amounts related to our pipeline connection
agreements, natural gas transportation and reservation agreements, access
right agreements and our pension and deferred compensation obligations.
(5) Includes lease rental payments in connection with (i) the acquisition of
Capitol related to properties previously sold by Capitol within twosale-leaseback transactions; and (ii) the sale of real property assets at 30
gasoline stations 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 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
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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 $7.3 million and $8.0 million in maintenance capital expenditures
for the three months ended March 31, 2020 and 2019, respectively, which are
included in capital expenditures in the accompanying consolidated statements of
cash flows, of which approximately $6.3 million and $7.4 million for the three
months ended March 31, 2020 and 2019, respectively, are related to our
investments in our gasoline station business. Repair and maintenance expenses
associated with existing assets that are minor in nature and do not extend the
useful life of existing assets are charged to operating expenses as incurred.
Expansion capital expenditures include expenditures to acquire assets to grow
our businesses or expand our existing facilities, such as projects that increase
our operating capacity or revenues by, for example, increasing dock capacity and
tankage, diversifying product availability, investing in raze and rebuilds and
new-to-industry gasoline stations and convenience stores, increasing storage
flexibility at various terminals and by adding terminals to our storage
network. We have the ability to fund our expansion capital expenditures through
cash from operations or our credit agreement or by issuing debt securities or
additional equity. We had approximately $4.4 million and $2.2 million in
expansion capital expenditures for the three months ended March 31, 2020 and
2019, respectively, primarily related to investments in our gasoline station
business.
We currently expect maintenance capital expenditures of approximately
$40.0 million to $50.0 million and expansion capital expenditures, excluding
acquisitions, of approximately $15.0 million to $25.0 million in 2020, relating
primarily to investments in our gasoline station business. These current
estimates depend, in part, on the timing of completion of projects, availability
of equipment and workforce, weather, the scope and duration of the COVID-19
pandemic and unanticipated events or opportunities requiring additional
maintenance or investments.
We believe that we will have sufficient cash flow from operations, borrowing
capacity under our credit agreement and the ability to issue additional equity
and/or debt securities to meet our financial commitments, debt service
obligations, contingencies and anticipated capital expenditures. However, we
are subject to business and operational risks, including uncertainties related
to the extent and duration of the COVID-19 pandemic and geopolitical events,
each of which could adversely affect our cash flow. A material decrease in our
cash flows would likely have an adverse effect on our borrowing capacity as well
as our ability to issue additional equity and/or debt securities.
Cash Flow
The following table summarizes cash flow activity (in thousands):
Three Months Ended
March 31,
2020 2019
Net cash provided by (used in) operating activities
Net cash used in investing activities$ (11,040) $
(6,641)
Net cash (used in) provided by financing activities
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.
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Net cash provided by (used in) operating activities was
Except for net income, the primary drivers of the changes in operating activities include the following (in thousands):
Three Months Ended Period over
March 31, Period
2020 2019 Change
Decrease (increase) in accounts receivable
$ 292,103 Decrease (increase) in inventories$ 235,979 $ (78,578) $ 314,557 (Decrease) increase in accounts payable$ (227,688) $ 34,219 $ (261,907) (Decrease) increase in change in derivatives$ (76,645) $ 26,768 $ (103,413) For the three months endedMarch 31, 2020 , the decreases in accounts receivable, inventories and accounts payable are largely due to the significant decrease in prices, primarily caused by the COVID-19 pandemic and geopolitical events. The increase in operating cash flow was also impacted by the year-over-year change in derivatives of$103.4 million in part due to the significant decrease in prices and an increase in the volume of physical forward contracts.
For the three months ended
Investing Activities Net cash used in investing activities was$11.0 million for the three months endedMarch 31 , 20120 and included$7.3 million in maintenance capital expenditures,$4.4 million in expansion capital expenditures and$0.5 million in seller note issuances, offset by$1.2 million in proceeds from the sale of property and equipment. The seller note issuances represent notes we received from buyers in connection with the sale of certain of our gasoline stations.
Net cash used in investing activities was
Please read "-Capital Expenditures" for a discussion of our capital expenditures
for the three months ended
Financing Activities Net cash used in financing activities was$84.5 million for the three months endedMarch 31, 2020 and included$115.0 million in net payments on our working capital revolving credit facility primarily due to the significant decrease in prices and$19.9 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner. Net cash used in financing activities was offset by$50.0 million in borrowing from our revolving credit facility in response to the uncertainty caused by the COVID-19 pandemic and$0.4 million in capital contributions from our noncontrolling interest at Basin Transload. Net cash provided by financing activities was$94.2 million for the three months endedMarch 31, 2019 and included$116.2 million in net borrowing from our working capital revolving credit facility, offset by$19.0 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner and$3.0 million in net payments on our revolving credit facility. See Note 8 of Notes to Consolidated Financial Statement for supplemental cash flow information related to our working capital revolving credit facility and revolving credit facility. 67 Table of Contents Credit Agreement As ofMarch 30, 2020 , certain subsidiaries of ours, as borrowers, and we and certain of our subsidiaries, as guarantors, had a$1.3 billion senior secured credit facility. OnMay 7, 2020 , we and certain of our subsidiaries entered into a fourth amendment to our credit agreement which, among other things, provides temporary adjustments to certain covenants and reduces the total aggregate commitment by$130.0 million (see "-Fourth Amendment to the Credit Agreement" below). We repay amounts outstanding and reborrow funds based on our working capital requirements and, therefore, classify as a current liability the portion of the working capital revolving credit facility we expect to pay down during the course of the year. The long-term portion of the working capital revolving credit facility is the amount we expect to be outstanding during the entire year. The credit agreement matures onApril 29, 2022 .
As of
· 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 $850.0 million ; and
· a
purposes.
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.
The average interest rates for the credit agreement were 3.5% and 4.7% for the
three months ended
As of
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 atMarch 31, 2020 . The credit agreement also contains a representation whereby there can be no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect (as defined in the credit agreement). In addition, the credit agreement limits distributions by us to our unitholders to the amount of Available Cash (as defined in the partnership agreement). Please read Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Credit Agreement" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information on the credit agreement.
Fourth Amendment to the Credit Agreement
OnMay 7, 2020 , we and certain of our subsidiaries entered into the Fourth Amendment to Third Amended and Restated Credit Agreement (the "Fourth Amendment"), which further amends the credit agreement. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the credit agreement. 68 Table of Contents
The Fourth Amendment amends certain terms, provisions and covenants of the credit agreement, including, without limitation:
(i) increases by 0.125% the applicable rate under the working capital facility
for borrowings of base rate loans, Eurocurrency rate loans and cost of funds
rate loans and for issuances of letters of credit;
(ii) adds two pricing levels under the revolving credit facility for borrowings
of base rate loans, Eurocurrency rate loans and cost of funds rate loans and
for issuances of letters of credit;
(iii) adds a Eurocurrency rate floor of 0.75% and a cost of funds rate floor of
0.50%;
(iv) for the four (4) quarters commencing with the quarter ended
(a) increases to Combined Total Leverage Ratio covenant levels and (b) a
reduction to the Combined Interest Coverage Ratio covenant levels; and
(v) reduces the aggregate commitments under the facilities by 10%, with the
commitments under the working capital facility reduced to
reduced to $400.0 million from $450.0 million .
All other material terms of the credit agreement remain substantially the same
as disclosed in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Credit Agreement" in our Annual
Report on Form 10-K for the year ended December 31, 2019 .
Senior Notes
We had 7.00% senior notes due 2027 and 7.00% senior notes due 2023 outstanding
at March 31, 2020 . Please read Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources-Senior Notes" in our Annual Report on Form 10-K for the year ended
December 31, 2019 for additional information on these senior notes due 2023.
Financing Obligations
Capitol Acquisition
On June 1, 2015 , we acquired retail gasoline stations and dealer supply
contracts from Capitol Petroleum Group ("Capitol"). In connection with the
acquisition, we assumed a financing obligation of $89.6 million associated with
two sale-leaseback transactions by Capitol for 53 leased sites that did not meet
the criteria for sale accounting. During the terms of these leases, which expire
in May 2028 and September 2029 , in lieu of recognizing lease expense for the
lease rental payments, we incur interest expense associated with the financing
obligation. Interest expense of approximately$2.3 million was recorded for each
of the three months ended March 31, 2020 and 2019, which is included in interest
expense in the accompanying consolidated statements of operations. The financing
obligation will amortize through expiration of the leases based upon the lease
rental payments which were $2.5 million for each of the three months ended
March 31, 2020 and 2019. The financing obligation balance outstanding at
March 31, 2020 was $86.8 million associated with the Capitol acquisition.
Sale-Leaseback Transaction
On June 29, 2016 , we sold to a premier institutional real estate investor (the
"Buyer") real property assets, including the buildings, improvements and
appurtenances thereto, at 30 gasoline stations and convenience stores located in
Connecticut , Maine , Massachusetts , New Hampshire and Rhode Island (the
"Sale-Leaseback Sites") for a purchase price of approximately $63.5 million . In
connection with the sale, we entered into a Master Unitary Lease Agreement with
the Buyer to lease back the real property assets sold with respect to the
Sale-Leaseback Sites (such Master Lease Agreement, together with the
Sale-Leaseback Sites, the "Sale-Leaseback Transaction").
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As a result of not meeting the criteria for sale accounting for these sites, the
Sale-Leaseback Transaction is accounted for as a financing arrangement. As such,
the property and equipment sold and leased back by us has not been derecognized
and continues to be depreciated. We recognized a corresponding financing
obligation of $62.5 million equal to the $63.5 million cash proceeds received
for the sale of these sites, net of $1.0 million financing fees. During the term
of the lease, which expires in June 2031 , in lieu of recognizing lease expense
for the lease rental payments, we incur interest expense associated with the
financing obligation. Lease rental payments are recognized as both interest
expense and a reduction of the principal balance associated with the financing
obligation. Lease rental payments are recognized as both interest expense and a
reduction of the principal balance associated with the financing
obligation. Interest expense was $1.1 million for each of the three months ended
March 31, 2020 and 2019. Lease rental payments were $1.2 million and
$1.1 million for the three months ended March 31, 2020 and 2019,
respectively. The financing obligation balance outstanding at March 31, 2020 was
$62.3 million associated with the Sale-Leaseback Transaction.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The outbreak of COVID-19 acrossthe United States and the responses of governmental bodies (federal, state and municipal), companies and individuals, including mandated and/or voluntary restrictions to mitigate the spread of the virus, have caused a significant economic downturn. The uncertainty surrounding the short and long-term impact of COVID-19, including the inability to project the timing of an economic recovery, may have an impact on our use of estimates. Actual results may differ from these estimates under different assumptions or conditions. These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment, and involve complex analysis: inventory, leases, revenue recognition, trustee taxes, derivative financial instruments, goodwill, evaluation of long-lived asset impairment and environmental and other liabilities. The significant accounting policies and estimates that we have adopted and followed in the preparation of our consolidated financial statements are detailed in Note 2 of Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no subsequent changes in these policies and estimates that had a significant impact on our financial condition and results of operations for the periods covered in this report, except as described in Note 19 of Notes to Consolidated Financial Statements herein for the adoption of ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," including modifications to that standard thereafter, and now codified as ASC 326 which we adopted onJanuary 1, 2020 .
Recent Accounting Pronouncements
A description and related impact expected from the adoption of certain new accounting pronouncements is provided in Note 19 of Notes to Consolidated Financial Statements included elsewhere in this report.
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