GLOBAL PARTNERS LP The following discussion and analysis of financial condition and results of
operations of
Overview
General
We are a master limited partnership formed inMarch 2005 . We own, control or have access to one of the largest terminal networks of refined petroleum products and renewable fuels inMassachusetts ,Maine ,Connecticut ,Vermont ,New Hampshire ,Rhode Island ,New York ,New Jersey andPennsylvania (collectively, the "Northeast"). We are one of the region's largest independent owners, suppliers and operators of gasoline stations and convenience stores. As ofDecember 31, 2020 , we had a portfolio of 1,548 owned, leased and/or supplied gasoline stations, including 277 directly operated convenience stores, primarily in the Northeast. We are also one of the largest distributors of gasoline, distillates, residual oil and renewable fuels to wholesalers, retailers and commercial customers in theNew England states andNew York . We engage in the purchasing, selling, gathering, blending, storing and logistics of transporting petroleum and related products, including gasoline and gasoline blendstocks (such as ethanol), distillates (such as home heating oil, diesel and kerosene), residual oil, renewable fuels, crude oil and propane and in the transportation of petroleum products and renewable fuels by rail from the mid-continent region ofthe United States andCanada . Collectively, we sold approximately$7.9 billion of refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane for the year endedDecember 31, 2020 . In addition, we had other revenues of approximately$0.4 billion for the year endedDecember 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 theNew 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
The COVID-19 pandemic has continued to make its presence felt at home, in the
office workplace and at our retail sites and terminal locations. We have
successfully executed our business continuity plans and at this time our
in-office employees continue to work remotely. We remain active in responding to
the challenges posed by the COVID-19 pandemic and continue to provide essential
products and services while prioritizing the safety of our employees, customers
and vendors in the communities where we operate.
The COVID-19 pandemic has resulted in an economic downturn and restricted travel
to, from and within the states in which we conduct our businesses. Federal,
state and municipal "stay at home" or similar-like directives have resulted in
decreases in the demand for gasoline and convenience store products. Social
distancing guidelines and directives limiting food operations at our convenience
stores have further contributed to a reduction in in-store traffic and sales.
The demand for diesel fuel has similarly (but not as drastically) been impacted.
We remain well positioned to pivot and address different (and, at times,
conflicting) directives from federal, state and municipal authorities designed
to mitigate the spread of the COVID-19 pandemic, permit the opening of
businesses and promote an economic recovery. From mid-March into April of 2020,
we saw reductions of more than 50% in gasoline volume and more than 20% in
convenience store sales but have since seen increases in both gasoline volume
and convenience store sales as some businesses reopened and directives from
federal, state and municipal authorities became less restrictive. That said,
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notwithstanding the introduction of country-wide vaccination programs, uncertainties surrounding the duration of the COVID-19 pandemic and demand at the pump, inside our stores and at our terminals remain.
Given the uncertainty in the early part of 2020 surrounding the short-term and long-term impacts of COVID-19, including the timing of an economic recovery, early in the second quarter we took certain steps to increase liquidity and create additional financial flexibility. Such steps included a 25% decrease to our quarterly distribution on our common units to$0.39375 per unit for the period fromJanuary 1, 2020 toMarch 31, 2020 . In addition, we borrowed$50.0 million under our revolving credit facility which was included in cash on our balance sheet. We also reduced planned expenses and 2020 capital spending. We amended our credit agreement to provide temporary adjustments to certain covenants. Given the stronger-than-expected performance in the second quarter, we paid down our revolving credit facility with the$50.0 million cash on hand and increased our planned 2020 capital spending. In addition, we increased our quarterly distribution on our common units for each of the second, third and fourth quarters of 2020.
Moving Forward - Our Perspective
The extent to which the COVID-19 pandemic may affect our operating results remains uncertain. The COVID-19 pandemic has had, and may continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition and results of operations and those of our customers, suppliers and other counterparties. Our inventory management is dependent on the use of hedging instruments which are managed based on the structure of the forward pricing curve. Daily market changes may impact periodic results due to the point-in-time valuation of these positions. Volatility in the oil markets resulting from COVID-19 and geopolitical events may impact our results. Business operations today, as compared to how we conducted our business in earlyMarch 2020 , reflect changes which may well remain for an indefinite period of time. In these uncertain times and volatile markets, we believe that we are operationally nimble and that our portfolio of assets may continue to provide us with opportunities. 2020 Events Purchase Agreement-OnDecember 14, 2020 , we announced the signing of an agreement to purchase retail fuel and convenience store assets fromConnecticut -basedConsumers Petroleum of Connecticut, Incorporated . The acquisition includes 27 company-operated gasoline stations with "Wheels"-branded convenience stores inConnecticut . The transaction also includes fuel supply agreements for approximately 25 gasoline stations located inConnecticut andNew York . The stations market fuel under the Citgo and Sunoco brands. The purchase is expected to close in the first half of 2021 subject to regulatory approvals and other customary closing conditions. 2029 Notes Offering and 2023 Notes Redemption-OnOctober 7, 2020 , we andGLP Finance Corp. (the "Issuers") issued$350.0 million aggregate principal amount of 6.875% senior notes due 2029 (the "2029 Notes") to several initial purchasers (the "2029 Notes Initial Purchasers") in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the "Securities Act"). We used the net proceeds from the offering to fund the redemption of our 7.00% senior notes due 2023 (the "2023 Notes") and to repay a portion of the borrowings outstanding under our credit agreement. The redemption of the 2023 Notes occurred onOctober 23, 2020 . OnFebruary 1, 2021 , we completed an exchange offer whereby holders of the 2029 Notes exchanged all of the 2029 Notes for an equivalent amount of senior notes registered under the Securities Act. The exchange notes are substantially identical to the 2029 Notes, except that the exchange notes are not subject to the restrictions on transfers or to any increase in annual interest rates for failure to comply with the 2029 Notes Registration Rights Agreement (defined below). Please read "-Liquidity and Capital Resources-Senior Notes" for additional information on the 2029 Notes.
2019 Event
2027 Notes Offering and 2022 Notes Tender Offer and Redemption- On
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$400.0 million aggregate principal amount of 7.00% senior notes due 2027 (the
"2027 Notes") to several initial purchasers (the "2027 Notes Initial
Purchasers") in a private placement exempt from the registration requirements
under the Securities Act. The 2027 Notes were resold by the 2027 Notes Initial
Purchasers to qualified institutional buyers pursuant to Rule 144A under the
Securities Act and to persons outside the United States pursuant to Regulation S
under the Securities Act. We used the net proceeds from the offering to fund the
repurchase of our 6.25% senior notes due 2022 (the "2022 Notes") in a tender
offer and to repay a portion of the borrowings outstanding under our credit
agreement. The redemption of the 2022 Notes occurred on August 30, 2019 .
On February 18, 2020 , we completed an exchange offer whereby holders of the 2027
Notes exchanged all of the 2027 Notes for an equivalent amount of senior notes
registered under the Securities Act. Please read "-Liquidity and Capital
Resources-Senior Notes" for additional information on the 2027 Notes.
2018 Events
Series A Preferred Unit Offering-OnAugust 7, 2018 , we issued 2,760,000 9.75% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units representing limited partner interests for$25.00 per Series A preferred unit in an offering registered under the Securities Act of 1933. We used the proceeds, net of underwriting discount and expenses, of$66.4 million to reduce indebtedness under our credit agreement. See Note 18 of Notes to Consolidated Financial Statements for additional information. Acquisition fromCheshire Oil Company, LLC -OnJuly 24, 2018 , we acquired the assets of ten company-operated gasoline stations and convenience stores fromNew Hampshire -basedCheshire Oil Company, LLC ("Cheshire") for approximately$33.4 million , including inventory. See Note 20 of Notes to Consolidated Financial Statements for additional information. Acquisition fromChamplain Oil Company, Inc. -OnJuly 17, 2018 , we acquired retail fuel and convenience store assets fromVermont -basedChamplain Oil Company, Inc. ("Champlain") for approximately$138.2 million , including inventory. The acquisition included 37 company-operated gasoline stations withJiffy Mart -branded convenience stores inVermont andNew Hampshire and approximately 24 fuel sites that are either owned or leased, including lessee dealer and commission agent locations. The transaction also included fuel supply agreements for approximately 65 gasoline stations, primarily inVermont andNew Hampshire . See Note 20 of Notes to Consolidated Financial Statements for additional information. Volumetric Ethanol Excise Tax Credit-In the first quarter of 2018, we recognized a one-time income item of approximately$52.6 million as a result of the extinguishment of a contingent liability related to the Volumetric Ethanol Excise Tax Credit, which tax credit program expired in 2011. Based upon the significant passage of time from that 2011 expiration date, including underlying statutes of limitation, as ofJanuary 31, 2018 we determined that the liability was no longer required. The recognition of this one-time income item did not impact cash flows from operations for the year endedDecember 31, 2018 .
Operating Segments
We purchase refined petroleum products, gasoline blendstocks, renewable fuels
and crude oil primarily from domestic and foreign refiners and ethanol
producers, crude oil producers, major and independent oil companies and trading
companies. We operate our businesses under three segments: (i) Wholesale,
(ii) Gasoline Distribution and Station Operations ("GDSO") and (iii) Commercial.
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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 and residual oil to home heating oil retailers and wholesale distributors. Generally, customers use their own vehicles or contract carriers to take delivery of the gasoline, distillates and propane at bulk terminals and inland storage facilities that we own or control or at which we have throughput or exchange arrangements. Ethanol is shipped primarily by rail and by barge. In our Wholesale segment, we obtain Renewable Identification Numbers ("RIN") in connection with our purchase of ethanol which is used for bulk trading purposes or for blending with gasoline through our terminal system. A RIN is a renewable identification number associated with government-mandated renewable fuel standards. To evidence that the required volume of renewable fuel is blended with gasoline, obligated parties must retire sufficient RINs to cover their Renewable Volume Obligation ("RVO"). 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 store sales, (ii) rental income from gasoline stations leased to dealers, from commissioned agents and from cobranding arrangements and (iii) sundries (such as car wash sales and lottery and ATM commissions).
As ofDecember 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 277 Commissioned agents 273 Lessee dealers 208 Contract dealers 790 Total 1,548 At our company-operated stores, we operate the gasoline stations and convenience stores with our employees, and we set the retail price of gasoline at the station. At commissioned agent locations, we own the gasoline inventory, and we set the retail price of gasoline at the station and pay the commissioned agent a fee related to the gallons sold. We receive rental income from commissioned agent leased gasoline stations for the leasing of the convenience store premises, repair bays and other businesses that may be conducted by the commissioned agent. At dealer-leased locations, the dealer purchases gasoline from us, and the dealer sets the retail price of gasoline at the dealer's station. We also receive rental income from (i) dealer-leased gasoline stations and (ii) cobranding arrangements. We also supply gasoline to locations owned and/or leased by independent contract dealers. Additionally, we have contractual relationships with distributors in certainNew England states pursuant to which we source and supply these distributors' gasoline stations with ExxonMobil-branded gasoline.
Commercial
In our Commercial segment, we include sales and deliveries to end user customers
in the public sector and to large commercial and industrial end users of
unbranded gasoline, home heating oil, diesel, kerosene, residual oil and bunker
fuel. In the case of public sector commercial and industrial end user customers,
we sell products primarily either through a competitive bidding process or
through contracts of various terms. We respond to publicly issued requests for
product proposals and quotes. We generally arrange for the delivery of the
product to the customer's designated location.
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Our Commercial segment also includes sales of custom blended fuels delivered by barges or from a terminal dock to ships through bunkering activity.
Seasonality
Due to the nature of our businesses and our reliance, in part, on consumer travel and spending patterns, we may experience more demand for gasoline during the late spring and summer months than during the fall and winter. Travel and recreational activities are typically higher in these months in the geographic areas in which we operate, increasing the demand for gasoline. Therefore, our volumes in gasoline are typically higher in the second and third quarters of the calendar year. However, the COVID-19 pandemic has had a negative impact on gasoline demand and the extent and duration of that impact is uncertain. As demand for some of our refined petroleum products, specifically home heating oil and residual oil for space heating purposes, is generally greater during the winter months, heating oil and residual oil volumes are generally higher during the first and fourth quarters of the calendar year. These factors may result in fluctuations in our quarterly operating results.
Outlook
This section identifies certain risks and certain economic or industry-wide factors, in addition to those described under "-Our Perspective on Global and the COVID-19 Pandemic," that may affect our financial performance and results of operations in the future, both in the short-term and in the long-term. Our results of operations and financial condition depend, in part, upon the following:
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.
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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 ultimately may not be accretive. If any of
these events were to occur, our future growth and ability to increase or
maintain distributions on our common units could be limited. We can give no
assurance that our transaction efforts will be successful or that any such
efforts will be completed on terms that are favorable to us.
The condition of credit markets may adversely affect our liquidity. In the
past, world financial markets experienced a severe reduction in the
availability of credit. Possible negative impacts in the future could include a
? decrease in the availability of borrowings under our credit agreement,
increased counterparty credit risk on our derivatives contracts and our
contractual counterparties could require us to provide collateral. In addition,
we could experience a tightening of trade credit from our suppliers.
We depend upon marine, pipeline, rail and truck transportation services for a
substantial portion of our logistics activities in transporting the products we
sell. Implementation of regulations and directives related to these
aforementioned services as well as disruption in any of these transportation
services could have an adverse effect on our financial condition, results of
operations and cash available for distribution to our unitholders. Hurricanes,
flooding and other severe weather conditions could cause a disruption in the
transportation services we depend upon and could affect the flow of service. In
? addition, accidents, labor disputes between providers and their employees and
labor renegotiations, including strikes, lockouts or a work stoppage, shortage
of railcars, trucks and barges, mechanical difficulties or bottlenecks and
disruptions in transportation logistics could also disrupt our business
operations. These events could result in service disruptions and increased
costs which could also adversely affect our financial condition, results of
operations and cash available for distribution to our unitholders. Other disruptions, such as those due to an act of terrorism or war, could also adversely affect our businesses.
We have contractual obligations for certain transportation assets such as
railcars, barges and pipelines. A decline in demand for (i) the products we
? sell or (ii) our logistics activities, could result in a decrease in the
utilization of our transportation assets, which could negatively impact our
financial condition, results of operations and cash available for distribution
to our unitholders.
Our gasoline financial results in our GDSO segment can be lower in the first
and fourth quarters of the calendar year due to seasonal fluctuations in
demand. Due to the nature of our businesses and our reliance, in part, on
consumer travel and spending patterns, we may experience more demand for
gasoline during the late spring and summer months than during the fall and
? winter. Travel and recreational activities are typically higher in these months
in the geographic areas in which we operate, increasing the demand for
gasoline. Therefore, our results of operations in gasoline can be lower in the
first and fourth quarters of the calendar year. The COVID-19 pandemic has had a
negative impact on gasoline demand and in-store traffic, and the extent and
duration of that impact is uncertain.
Our heating oil and residual oil financial results can be lower in the second
and third quarters of the calendar year. Demand for some refined petroleum
products, specifically home heating oil and residual oil for space heating
? purposes, is generally higher during November through March than during April
through October. We obtain a significant portion of these sales during the
winter months. 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.
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Warmer weather conditions could adversely affect our results of operations and
financial condition. Weather conditions generally have an impact on the demand
for both home heating oil and residual oil. Because we supply distributors
? whose customers depend on home heating oil and residual oil for space heating
purposes during the winter, warmer-than-normal temperatures during the first
and fourth calendar quarters can decrease the total volume we sell and the
gross profit realized on those sales.
Energy efficiency, higher prices, new technology and alternative fuels could
reduce demand for our 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. 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
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
produced in or imported into
the market price of RINs. We cannot predict the future prices of RINs. RIN
prices are dependent upon a variety of factors, including
related to the amount of RINs required and the total amounts that can be
generated, the availability of RINs for purchase, the price at which RINs can
? be purchased, and levels of transportation fuels produced, all of which can
vary significantly from quarter to quarter. If sufficient RINs are unavailable
for purchase or if we have to pay a significantly higher price for RINs, or if
we are otherwise unable to meet the
operations and cash flows could be 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
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
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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 could have an adverse effect on our financial condition, results
of operations and cash available for distribution to our unitholders.
New, stricter environmental laws and other industry-related regulations or
environmental litigation could significantly impact our operations and/or
increase our costs, which could adversely affect our results of operations and
financial condition. Our operations are subject to federal, state and municipal
laws and regulations regulating, among other matters, logistics activities,
product quality specifications and other environmental matters. The trend in
environmental regulation has been towards more restrictions and limitations on
activities that may affect the environment over time. For example, President
Biden signed an executive order calling for new or more stringent emissions
standards for new, modified and existing oil and gas facilities. Our businesses
may be adversely affected by increased costs and liabilities resulting from
such stricter laws and regulations. We try to anticipate future regulatory
requirements that might be imposed and plan accordingly to remain in compliance
with changing environmental laws and regulations and to minimize the costs of
? such compliance. Risks related to our environmental permits, including the risk
of noncompliance, permit interpretation, permit modification, renewal of
permits on less favorable terms, judicial or administrative challenges to
permits by citizens groups or federal, state or municipal entities or permit
revocation are inherent in the operation of our businesses, as it is with other
companies engaged in similar businesses. We may not be able to renew the
permits necessary for our operations, or we may be forced to accept terms in
future permits that limit our operations or result in additional compliance
costs. There can be no assurances as to the timing and type of such changes in
existing laws or the promulgation of new laws or the amount of any required
expenditures associated therewith. Climate change continues to attract
considerable public and scientific attention. In recent years environmental
interest groups have filed suit against companies in the energy industry
related to climate change. Should such suits succeed, we could face additional
compliance costs or litigation risks.
Further regulation of the transport by rail of fuel products may adversely
affect our financial condition and results of operations. Over the last several
years, federal and state agencies have adopted various requirements governing
the transport of fuel products, such as crude oil and ethanol. Were these
bodies to establish more stringent design or construction standards for
railcars, or impose other requirements for such railroad tank cars that are
used to transport, by example, crude oil and ethanol, those requirements,
? individually or in the aggregate, may lead to shortages of compliant railcars,
or limitations on deliveries of these products, which in either case could
adversely affect our businesses. In recent years, non-governmental groups have
intensified their efforts to use federal, state and municipal laws to restrict
the transportation of fuels products, including, without limitation, crude oil
and ethanol by railroad tank cars. Additional regulations regarding the
movement and storage of fossil fuel products by transportation modalities could
potentially expose our operations to duplicative and possibly inconsistent
regulation.
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Results of Operations
Evaluating Our Results of Operations
Our management uses a variety of financial and operational measurements to analyze our performance. These measurements include: (1) product margin, (2) gross profit, (3) 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 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.
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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.
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 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 . 69 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): Year Ended December 31, 2020 2019 2018 Net income attributable to Global Partners LP$ 102,210 $ 35,867 $ 103,905 EBITDA (1)(2)$ 285,529 $ 234,374 $ 304,312 Adjusted EBITDA (1)(2)$ 287,731 $ 233,666 $ 310,606
Distributable cash flow (3)(4)$ 156,392 $ 95,713
$ 173,688 Wholesale Segment: Volume (gallons) 3,599,794 4,153,831 3,620,983 Sales
Gasoline and gasoline blendstocks$ 3,008,490 $ 5,358,550 $ 4,732,028 Crude oil (5) 84,046 96,419
109,719
Other oils and related products (6) 1,486,539 1,974,897
2,049,043
Total$ 4,579,075 $ 7,429,866 $ 6,890,790 Product margin Gasoline and gasoline blendstocks$ 100,818 $ 83,982 $ 76,741 Crude oil (5) (672) (13,047)
7,159
Other oils and related products (6) 82,999 51,584
53,389
Total$ 183,145 $ 122,519 $ 137,289 Gasoline Distribution and Station Operations Segment: Volume (gallons) 1,360,252 1,622,122 1,596,453 Sales Gasoline$ 2,545,616 $ 3,806,892 $ 4,081,498 Station operations (7) 431,041 466,761 427,211 Total$ 2,976,657 $ 4,273,653 $ 4,508,709 Product margin Gasoline$ 398,016 $ 374,550 $ 373,303 Station operations (7) 205,926 225,078 203,098 Total$ 603,942 $ 599,628 $ 576,401 Commercial Segment: Volume (gallons) 568,230 743,545 645,393 Sales$ 765,867 $ 1,378,211 $ 1,273,103 Product margin$ 15,195 $ 28,540 $ 23,611 Combined sales and product margin: Sales$ 8,321,599 $ 13,081,730 $ 12,672,602 Product margin (8)$ 802,282 $ 750,687 $ 737,301 Depreciation allocated to cost of sales (81,144) (87,930)
(86,892)
Combined gross profit$ 721,138 $ 662,757
GDSO portfolio as ofDecember 31, 2020 , 2019 and 2018: Company operated 277 289 297 Commissioned agents 273 258 259 Lessee dealers 208 216 237 Contract dealers 790 788 786 Total GDSO portfolio 1,548 1,551 1,579 70 Table of Contents Year Ended December 31, 2020 2019 2018 Weather conditions: Normal heating degree days 5,630 5,630 5,630 Actual heating degree days 5,029 5,152 5,391
Variance from normal heating degree days (11) % (8)
% (4) % Variance from prior period actual heating degree days (2) % (4) % 2 %
EBITDA and Adjusted EBITDA are non-GAAP financial measures which are (1) 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.
EBITDA and Adjusted EBITDA include a loss on early extinguishment of debt of
related to the 2022 Notes (see Note 8 of Notes to Consolidated Financial (2) Statements). EBITDA and Adjusted EBITDA in 2018 include a one-time gain of
approximately
liability related to a Volumetric Ethanol Excise Tax Credit and a lease exit
and termination gain of
Financial Statements).
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 (3) 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.
Distributable cash flow includes a loss on early extinguishment of debt ofrelated to the 2022 Notes (see Note 8 of Notes to Consolidated Financial (4) Statements). Distributable cash flow in 2018 includes a one-time gain of
approximately
liability related to a Volumetric Ethanol Excise Tax Credit (see Note 2 of
Notes to Consolidated Financial Statements).
(5) Crude oil consists of our crude oil sales and revenue from our logistics
activities.
(6) Other oils and related products primarily consist of distillates, residual
oil and propane.
(7) Station operations consist of convenience stores sales, rental income and
sundries.
Product margin is a non-GAAP financial measure which is discussed above under (8) "-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
(in
thousands):
Year Ended December 31,
2020 2019 2018
Reconciliation of net income to EBITDA and Adjusted
EBITDA:
Net income $ 101,682 $ 35,178 $ 102,403
Net loss attributable to noncontrolling interest 528 689 1,502
Net income attributable to Global Partners LP 102,210 35,867 103,905 Depreciation and amortization, excluding the impact of noncontrolling interest
99,899 107,557 105,639
Interest expense, excluding the impact of
noncontrolling interest 83,539 89,856 89,145
Income tax (benefit) expense (119) 1,094 5,623
EBITDA (1) 285,529 234,374 304,312
Net loss (gain) on sale and disposition of assets 275 (2,730) 5,880
Long-lived asset impairment 1,927 2,022 414
Adjusted EBITDA (1) $ 287,731 $ 233,666 $ 310,606
Reconciliation of net cash provided by operating
activities to EBITDA and Adjusted EBITDA:
Net cash provided by operating activities $ 312,526 $
94,402
(110,709) 48,968 40,385
Net cash from operating activities and changes in
operating assets and liabilities attributable to
noncontrolling interest 292 54 303
Interest expense, excluding the impact of
noncontrolling interest 83,539 89,856 89,145
Income tax (benefit) expense (119) 1,094 5,623
EBITDA (1) 285,529 234,374 304,312
Net loss (gain) on sale and disposition of assets 275 (2,730) 5,880
Long-lived asset impairment 1,927 2,022 414
Adjusted EBITDA (1) $ 287,731 $ 233,666 $ 310,606 EBITDA and Adjusted EBITDA include a loss on early extinguishment of debt of
related to the 2022 Notes (see Note 8 of Notes to Consolidated Financial (1) Statements). EBITDA and Adjusted EBITDA in 2018 include a one-time gain of
approximately
liability related to a Volumetric Ethanol Excise Tax Credit and a lease exit
and termination gain of $3.5 million (see Note 2 of Notes to Consolidated
Financial Statements.
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The following table presents reconciliations of distributable cash flow to the
most directly comparable GAAP financial measures on a historical basis (in
thousands):
Year Ended December 31,
2020 2019 2018
Reconciliation of net income to distributable cash
flow:
Net income $ 101,682 $ 35,178 $ 102,403
Net loss attributable to noncontrolling interest 528 689 1,502
Net income attributable to Global Partners LP 102,210 35,867 103,905 Depreciation and amortization, excluding the impact of noncontrolling interest
99,899 107,557 105,639 Amortization of deferred financing fees and senior notes discount
5,241 5,940 6,873
Amortization of routine bank refinancing fees (3,970) (3,754) (4,088) Maintenance capital expenditures, excluding the impact of noncontrolling interest
(46,988) (49,897) (38,641)
Distributable cash flow (1)(2) 156,392 95,713 173,688
Distributions to Series A preferred unitholders (3) (6,728) (6,728) (2,691)
Distributable cash flow after distributions to Series
A preferred unitholders $ 149,664 $
88,985
Reconciliation of net cash provided by operating activities to distributable cash flow: Net cash provided by operating activities$ 312,526 $
94,402
(110,709) 48,968 40,385
Net cash from operating activities and changes in 292 54 303
operating assets and liabilities attributable to
noncontrolling interest
Amortization of deferred financing fees and senior
notes discount 5,241 5,940 6,873
Amortization of routine bank refinancing fees (3,970) (3,754) (4,088) Maintenance capital expenditures, excluding the impact of noncontrolling interest
(46,988) (49,897) (38,641)
Distributable cash flow (1)(2) 156,392 95,713 173,688
Distributions to Series A preferred unitholders (3) (6,728) (6,728) (2,691)
Distributable cash flow after distributions to Series
A preferred unitholders $ 149,664 $ 88,985 $ 170,997 Distributable cash flow is a non-GAAP financial measure which is discussed
above under "-Evaluating Our Results of Operations." As defined by our (1) 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.
Distributable cash flow includes a loss on early extinguishment of debt ofrelated to the 2022 Notes (see Note 8 of Notes to Consolidated Financial (2) Statements). Distributable cash flow in 2018 includes a one-time gain of
approximately
liability related to a Volumetric Ethanol Excise Tax Credit (see Note 2 of
Notes to Consolidated Financial Statements).
Distributions to Series A preferred unitholders represent the distributions (3) 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 for Years 2020, 2019 and 2018
Consolidated Sales
Our total sales were$8.3 billion and$13.1 billion for 2020 and 2019, respectively, a decrease of$4.8 billion , or 36%, due to decreases in prices and volume sold. Our aggregate volume of product sold was 5.5 billion gallons and 6.5 billion gallons for 2020 and 2019, respectively, a decrease of 1.0 billion gallons in part due to the impact of the COVID-19 pandemic. The decrease in volume sold includes a decrease of 554 million gallons in our Wholesale segment due to a decline in gasoline and gasoline blendstocks, partially offset by increased volume in other oils and related products and crude oil, and decreases of 262 million gallons in our GDSO segment and 175 million gallons in our Commercial segment. Our total sales were$13.1 billion and$12.7 billion for 2019 and 2018, respectively, an increase of$0.4 billion , or 3%, due to an increase in volume sold. Our aggregate volume of product sold was 6.5 billion gallons and 5.8 billion gallons for 2019 and 2018, respectively, an increase of 0.7 billion gallons. The increase in volume sold includes increases of 533 million gallons in our Wholesale segment, primarily in gasoline and gasoline blendstocks, 98 million gallons in our Commercial segment and 26 million gallons in our
GDSO
segment.
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Gross Profit
Our gross profit was $721.1 million and $662.7 million for 2020 and 2019,
respectively, an increase of $58.4 million , or 9%, primarily due to more
favorable market conditions in our Wholesale segment and higher fuel margins
(cents per gallon) in gasoline distribution in our GDSO segment which offset a
decrease in GDSO fuel volume and a decrease in our station operations product
margin. The increase in gross profit was offset by a decline in our Commercial
segment largely due to a decrease in bunkering activity.
Our gross profit was $662.7 million and $650.4 million for 2019 and 2018,
respectively, an increase of $12.3 million , or 2%, primarily due to the
acquisitions of Champlain and Cheshire in July 2018 (collectively the "2018
Acquisitions") in our GDSO segment. The increase in gross profit was offset by a
decline in crude oil product margin in our Wholesale segment, primarily due to
$21.6 million in revenue recognized in 2018 related to a take-or-pay contract
with one particular customer which was not recognized in 2019 as that contract
expired in June 2018 .
Results for Wholesale Segment
Gasoline and Gasoline Blendstocks. Sales from wholesale gasoline and gasoline
blendstocks were $3.0 billion and $5.3 billion for 2020 and 2019, respectively,
a decrease of $2.3 billion , or 44%, due to decreases in prices and volume sold.
Our gasoline and gasoline blendstocks product margin was $100.8 million and
$84.0 million for 2020 and 2019, respectively, an increase of $16.8 million , or
20%. During the second quarter of 2020, there was a significant recovery in the
supply/demand imbalance at the end of the first quarter. The forward product
pricing curve flattened which positively impacted our product margins. Our
product margin also benefitted due to more favorable market conditions in
gasoline in the fourth quarter of 2020 compared to the same period in 2019 which
was negatively impacted due to unfavorable market conditions. In the first
quarter of 2020, the COVID-19 pandemic and the price war between Saudi Arabia
and Russia caused a rapid decline in prices, steepening the forward product
pricing curve which negatively impacted our product margin in gasoline.
Sales from wholesale gasoline and gasoline blendstocks were $5.3 billion and
$4.7 billion for 2019 and 2018, respectively, an increase of $0.6 billion , or
13%, due to an increase in volume sold. Our gasoline and gasoline blendstocks
product margin was $84.0 million and $76.7 million for 2019 and 2018,
respectively, an increase of $7.3 million , or 9%, primarily due to more
favorable market conditions in gasoline, offset by less favorable market
conditions in gasoline blendstocks, primarily ethanol.
Crude Oil. Crude oil sales and logistics revenues were $84.0 million and
$96.4 million for 2020 and 2019, respectively, a decrease of $12.4 million , or
13%, primarily due to a decrease in prices, partially offset by an increase in
volume sold. Our crude oil product margin was ($0.7 million ) and ($13.0 million )
for 2020 and 2019, respectively, an increase of $12.3 million , or 95%, primarily
due to more favorable market conditions largely in the second quarter including
the flattening of the forward product pricing curve.
Crude oil sales and logistics revenues were $96.4 million and $109.7 million for
2019 and 2018, respectively, a decrease of $13.3 million , or 12%, primarily due
to the $21.6 million decrease in take-or-pay contract revenue, partially offset
by an increase in volume sold. Our crude oil product margin was ($13.0 million )
and $7.2 million for 2019 and 2018, respectively, a decrease of $20.2 million ,
or 282%, primarily due to the $21.6 million decrease in take-or-pay contract
revenue. Our product margin for 2019 was favorably impacted by lower railcar
related expenses.
Other Oils and Related Products. Sales from other oils and related products
(primarily distillates and residual oil) were $1.5 billion and $2.0 billion for
2020 and 2019, respectively, a decrease of $0.5 billion , or 25%, in part due to
a decline in prices, partially offset by an increase in volume sold. Our product
margin from other oils and related products was $83.0 million and $51.6 million
and for 2020 and 2019, respectively, an increase of $31.4 million , or 61%.
During the second quarter of 2020, there was a significant recovery in the
supply/demand imbalance at the end of the first quarter. The forward product
pricing curve flattened which positively impacted our product margins. Our
product margin also benefitted from more favorable market conditions in the
fourth quarter of 2020 compared to the same period in 2019, largely in
distillates. In the first quarter of 2020, the COVID-19 pandemic and the price
war between Saudi Arabia and Russia caused a rapid decline in prices, steepening
the forward product pricing curve, which negatively impacted our
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product margins.
Sales from other oils and related products were $2.0 billion and $2.1 billion
for 2019 and 2018, respectively, a decrease of $0.1 billion , or 4%, in part due
to a decline in prices, partially offset by an increase in residual oil volume
sold. Our product margin from other oils and related products was $51.6 million
and $53.4 million for 2019 and 2018, respectively, a decrease of $1.8 million ,
or 3%. Our product margin in distillates for 2019 was negatively impacted due to
less favorable market conditions, largely in the fourth quarter, and to weather
that was both warmer than normal and warmer than in 2018.
Results for Gasoline Distribution and Station Operations Segment
Gasoline Distribution. Sales from gasoline distribution were$2.5 billion and$3.8 billion for 2020 and 2019, respectively, a decrease of$1.3 billion , or 34%, due to decreases in prices and volume sold largely due to the impact of the COVID-19 pandemic. Our product margin from gasoline distribution was$398.0 million and$374.5 million for 2020 and 2019, respectively, an increase of$23.5 million , or 6%, primarily due to higher fuel margins (cents per gallon) which more than offset the decline in volume sold. Our product margin for 2020 benefitted from declining wholesale prices in the first quarter of 2020, primarily in March due to the COVID-19 pandemic and geopolitical events. Declining wholesale gasoline prices can improve our gasoline distribution product margin, the extent of which depends on the magnitude and duration of the decline. Sales from gasoline distribution were$3.8 billion and$4.1 billion for 2019 and 2018, respectively, a decrease of$0.3 billion , or 7%, due to a decline in prices, partially offset by an increase in volume sold. Our product margin from gasoline distribution was$374.5 million and$373.3 million for 2019 and 2018, respectively, an increase of$1.2 million , primarily due to the 2018 Acquisitions. Our product margin in 2019 was negatively impacted by lower fuel margins (cents per gallon) in the fourth quarter compared to the fourth quarter of 2018 when fuel margins were higher due to a decline in wholesale gasoline prices. 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$431.0 million and$466.7 million for 2020 and 2019, respectively, a decrease of$35.7 million , or 8%. Our product margin from station operations was$205.9 million and$225.1 million for 2020 and 2019, respectively, a decrease of$19.2 million , or 9%. The decreases in sales and product margin are primarily due to less activity at our convenience stores, primarily due to the impact of the COVID-19 pandemic. Revenues from our station operations were$466.7 million and$427.2 million for 2019 and 2018, respectively, an increase of$39.5 million , or 9%. Our product margin from station operations was$225.1 million and$203.1 million for 2019 and 2018, respectively, an increase of$22.0 million , or 11%, primarily due to the 2018 Acquisitions.
Results for Commercial Segment
Our commercial sales were$0.8 billion and$1.4 billion for 2020 and 2019, respectively, a decrease of$0.6 billion , or 43%, due to decreases in prices and volume sold. Our commercial product margin was$15.2 million and$28.5 million for 2020 and 2019, respectively, a decrease of$13.3 million , or 47%, largely due to a decrease in bunkering activity. Our commercial sales were$1.4 billion and$1.3 billion for 2019 and 2018, respectively, an increase of$0.1 billion , or 8%, due to an increase in volume sold. Our commercial product margin was$28.5 million and$23.6 million for 2019 and 2018, respectively, an increase of$4.9 million , or 21%, primarily due to favorable market conditions in bunkering.
Selling, General and Administrative Expenses
SG&A expenses were
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$21.6 million , or 13%, including increases of $16.6 million in accrued
discretionary incentive compensation, $1.6 million in wages and benefits,
$1.4 million in costs associated with the COVID-19 pandemic, $1.3 million in
advertising costs and $1.0 million in professional fees, offset by a decrease of
$0.3 million in various other SG&A expenses.
SG&A expenses were $170.9 million and $171.0 million for 2019 and 2018,
respectively, a decrease of $0.1 million , or less than 1%, including decreases
of $4.6 million in incentive compensation and $3.9 million in acquisition costs
recorded in 2018 that were not incurred in 2019, offset by increases of
$5.6 million in wages and $2.1 million in benefits in part to support our GDSO
business, including the 2018 Acquisitions, and $0.7 million in various SG&A
expenses.
Operating Expenses
Operating expenses were$323.3 million and$342.4 million for 2020 and 2019, respectively, a decrease of$19.1 million , or 6%, due to a decrease of$21.4 million associated with our GDSO operations, in part due to lower credit card fees related to the reduction in volume and price, lower maintenance and repair expenses and lower salary expense in part attributable to reduced store hours, all of which were partly the result of the COVID-19 pandemic. The decrease in operating expenses was offset by an increase of$2.3 million associated with our terminal operations, primarily related to higher maintenance and repair expenses. Operating expenses were$342.4 million and$321.1 million for 2019 and 2018, respectively, an increase of$21.3 million , or 7%, due to an increase of$21.9 million associated with our GDSO operations, primarily due to the 2018 Acquisitions, partially offset by decreases in expenses associated with our terminal operations and with the sale of sites.
Gain on Trustee Taxes
In 2018, we recognized a one-time gain of approximately$52.6 million as a result of the extinguishment of a contingent liability related to the Volumetric Ethanol Excise Tax Credit, which tax credit program expired in 2011. Based upon the significant passage of time from that 2011 expiration date, including underlying statutes of limitation, as ofJanuary 31, 2018 we determined that the liability was no longer required.
See Note 2 of Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies-Trustee Taxes" for additional information.
Lease Exit and Termination Gain
InDecember 2016 , we voluntarily terminated early a sublease with a counterparty for 1,610 railcars that were underutilized due to unfavorable market conditions in the crude oil by rail market. Separately, we entered into a fleet management services agreement (effectiveJanuary 1, 2017 ) (the "Services Agreement") with the counterparty, pursuant to which we would provide railcar storage, freight, insurance and other services on behalf of the counterparty. During each of 2019 and 2018, we were released from certain of our obligations under the Services Agreement, which resulted in a reduction of the remaining accrued incremental costs of$0.5 million and$3.5 million for the years endedDecember 31, 2019 and 2018, respectively, which benefit is included in lease exit and termination gain in the accompanying statements of operations.
Amortization Expense
Amortization expense related to our intangible assets was
Net (Loss) Gain on Sale and Disposition of Assets
Net (loss) gain on sale and disposition of assets was (
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2019 and 2018, respectively, primarily due to the sale of GDSO sites. Included
in the net (loss) gain on sale and disposition of assets is approximately
Long-Lived Asset Impairment
We recognized an impairment charge relating to certain right-of-use assets in the amount of$1.9 million for 2020, of which$1.7 million was allocated to the Wholesale segment and$0.2 million was allocated to the GDSO segment. We had no impairment charges relating to right-of-use assets for 2019 and 2018.
We recognized an impairment charge relating to long-lived assets used at certain
gasoline stations and convenience stores in the amount of
Interest Expense
Interest expense was$83.5 million and$89.9 million for 2020 and 2019, respectively, a decrease of$6.4 million , or 7%, due to due to lower average balances on our credit facilities and lower interest rates, which more than offset the$0.7 million write-off of deferred financing fees associated with the amendment to our credit agreement inMay 2020 .
Interest expense was
Loss on Early Extinguishment of Debt
In 2020 as a result of the redemption of the 2023 Notes, we recorded a
In 2019 as a result of the repurchase of the 2022 Notes, we recorded a
Please read "-Liquidity and Capital Resources-Senior Notes" for additional information.
Income Tax Benefit (Expense)
Income tax benefit (expense) was$0.1 million , ($1.1 million ) and ($5.6 million ) for 2020, 2019 and 2018, respectively, which reflects the income tax (benefit) expense from the operating results of GMG, which is a taxable entity for federal and state income tax purposes. For 2020, the income tax benefit consists of an income tax benefit of$6.3 million (discussed below) offset by an income tax expense of ($6.2 million ). 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 for 2020. OnJanuary 15, 2021 , we received cash refunds totaling$15.8 million associated with the carryback of losses generated in 2018 with respect to the 2016 and 2017 tax years. 77 Table of Contents
Net Loss Attributable to Noncontrolling Interest
InFebruary 2013 , we acquired a 60% membership interest inBasin Transload . The net loss attributable to noncontrolling interest was$0.5 million ,$0.7 million and$1.5 million for 2020, 2019 and 2018, respectively, which represents the 40% noncontrolling ownership of the net loss reported. In connection with the terms of an agreement between the minority members ofBasin Transload and us, onSeptember 29, 2020 , we acquired the minority members' collective 40% interest inBasin Transload (see Note 23 of Notes to Consolidated Financial Statements for additional information).
Liquidity and Capital Resources
Liquidity
Our primary liquidity needs are to fund our working capital requirements, capital expenditures and distributions and to service our indebtedness. Our primary sources of liquidity are cash generated from operations, amounts available under our working capital revolving credit facility and equity and debt offerings. Please read "-Credit Agreement" for more information on our working capital revolving credit facility.
Given the uncertainty surrounding the short-term and long-term impacts of COVID-19, including the timing of an economic recovery, early in the second quarter we took certain steps to increase liquidity and create additional financial flexibility. Such steps included a 25% decrease to our quarterly distribution on our common units for the period fromJanuary 1, 2020 toMarch 31, 2020 . In addition, we borrowed$50.0 million under our revolving credit facility which was included in cash on our balance sheet. We also reduced planned expenses and 2020 capital spending. We amended our credit agreement to provide temporary adjustments to certain covenants. Given the stronger-than-expected performance in the second quarter, we paid down our revolving credit facility with the$50.0 million cash on hand and increased our planned 2020 capital spending. In addition, we increased our quarterly distribution on our common units for each of the second, third and fourth quarters of 2020. We believe that our current level of cash and borrowing capacity under our credit agreement will be sufficient to meet our liquidity needs. Working capital was$283.9 million and$250.6 million atDecember 31, 2020 and 2019, respectively, an increase of$33.3 million . Changes in current assets and current liabilities increasing our working capital include decreases of$165.5 million in accounts payable and$114.5 million in the current portion of our working capital revolving credit facility, primarily due to lower prices, for a total increase in working capital of$280.0 million . The increase in working capital was offset by decreases of$185.9 million in accounts receivable and$66.1 million in inventories, also primarily due to lower prices.
Cash Distributions
Common Units
During 2020, we paid the following cash distributions to our common unitholders
and our general partner:
Distribution Paid for the
Cash Distribution Payment Date Total Paid Quarterly Period Ended
February 14, 2020 $ 18.3 million Fourth quarter 2019
May 15, 2020 $ 13.5 million First quarter 2020
August 14, 2020 $ 15.7 million Second quarter 2020
November 13, 2020 $ 17.3 million Third quarter 2020
In addition, on January 26, 2021 , the board of directors of our general partner
declared a quarterly cash distribution of $0.55 per unit ($2.20 per unit on an
annualized basis) on all of our outstanding common units for the period from
October 1, 2020 through December 31, 2020 to our common unitholders of record as
of the close of business February 8, 2020 . This distribution resulted in our
reaching our third target level distribution for the quarter ended December 31,
2020 . On February 12, 2021 , we paid the total cash distribution of approximately
$19.3 million .
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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
February 18, 2020 $ 1.7 million November 15, 2019 - February 14, 2020
May 15, 2020 $ 1.7 million February 15, 2020 - May 14, 2020
August 17, 2020 $ 1.7 million May 15, 2020 - August 14, 2020
November 16, 2020 $ 1.7 million August 15, 2020 - November 14, 2020
In addition, on January 19, 2021 , the board of directors of our general partner
declared a quarterly cash distribution of $0.609375 per unit ($2.4375 per unit
on an annualized basis) on our Series A preferred units for the period from
November 15, 2020 through February 14, 2021 to our preferred unitholders of
record as of the opening of business on February 1, 2021 . On February 21, 2021 ,
we paid the total cash distribution of approximately $1.7 million .
Contractual Obligations
We have contractual obligations that are required to be settled in cash. The amounts of our contractual obligations atDecember 31, 2020 were as follows
(in
thousands):
Payments Due by Period
2025 and
Contractual Obligations 2021 2022 2023 2024 Thereafter Total
Credit facility
obligations (1) $ 43,433 $ 274,673 $ - $ - $ - $ 318,106
Senior notes obligations
(2) 40,031 52,063 52,063 52,063 942,282 1,138,502
Operating lease
obligations (3) 94,460 66,371 52,923 41,392 128,925 384,071
Other long-term
liabilities (4) 28,916 22,078 13,222 13,123 41,417 118,756
Financing obligations
(5) 15,024 15,268 15,518 15,774 82,158 143,742
Total $ 221,864 $ 430,453 $ 133,726 $ 122,352 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 (1) 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.
Includes principal and interest on our senior notes. No principal payments (2) are required prior to maturity. See "-Liquidity and Capital Resources-Senior
Notes" for additional information on our senior notes.
Includes operating lease obligations related to leases for office space and (3) computer equipment, land, gasoline stations, railcars and barges. See Note 3
of Notes to Consolidated Financial Statements for additional information.
Includes amounts related to our 15-year brand fee agreement entered into in
2010 with ExxonMobil and amounts related to our pipeline connection (4) agreements, natural gas transportation and reservation agreements and access
right agreements (see Note 11 of Notes to Consolidated Financial Statements
for additional information on these agreements) and our pension and deferred
compensation obligations.
Includes lease rental payments in connection with (i) the acquisition of
sale-leaseback transactions; and (ii) the sale of real property assets at 30 (5) 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.
See Note 3 of Notes to Consolidated Financial Statements with respect to sublease information related to certain lease agreements and Note 11 of Notes to Consolidated Financial Statements with respect to purchase commitments.
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Capital Expenditures
Our operations require investments to maintain, expand, upgrade and enhance existing operations and to meet environmental and operational regulations. We categorize our capital requirements as either maintenance capital expenditures or expansion capital expenditures. Maintenance capital expenditures represent capital expenditures to repair or replace partially or fully depreciated assets to maintain the operating capacity of, or revenues generated by, existing assets and extend their useful lives. Maintenance capital expenditures also include expenditures required to maintain equipment reliability, tank and pipeline integrity and safety and to address certain environmental regulations. We anticipate that maintenance capital expenditures will be funded with cash generated by operations. We had approximately$47.0 million ,$49.9 million and$38.6 million in maintenance capital expenditures for the years endedDecember 31, 2020 , 2019 and 2018, respectively, which are included in capital expenditures in the accompanying consolidated statements of cash flows, of which approximately$37.3 million ,$45.0 million and$33.6 million for 2020, 2019 and 2018, 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$29.3 million ,$33.0 million and$175.7 million in expansion capital expenditures, including acquisitions, for the years endedDecember 31, 2020 , 2019 and 2018, respectively, primarily related to investments in our gasoline station business. In 2020, the$29.3 million in expansion capital expenditures included approximately$23.7 million in raze and rebuilds, expansion and improvements at retail gasoline stations and new-to-industry sites and$5.6 million in other expansion capital expenditures, primarily related to investments at our terminals and information technology projects. In 2019, the$33.0 million in expansion capital expenditures included approximately$31.1 million in raze and rebuilds, expansion and improvements at retail gasoline stations and new-to-industry sites and$1.9 million in other expansion capital expenditures, primarily related to investments at our terminals and information technology projects. In 2018, the$175.7 million in expansion capital expenditures included approximately$145.1 million in property and equipment associated with the acquisitions of Cheshire and Champlain. In addition, we had$30.6 million in expansion capital expenditures primarily related to investments in our gasoline stations, including, in part, raze and rebuilds and new-to-industry sites. We currently expect maintenance capital expenditures of approximately$45.0 million to$55.0 million and expansion capital expenditures, excluding acquisitions, of approximately$40.0 million to$50.0 million in 2021, 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. 80 Table of Contents Cash Flow The following table summarizes cash flow activity for the years endedDecember 31 (in thousands): 2020 2019 2018
Net cash provided by operating activities
168,856
Net cash used in investing activities
50,127 Operating Activities Cash flow from operating activities generally reflects our net income, balance sheet changes arising from inventory purchasing patterns, the timing of collections on our accounts receivable, the seasonality of parts of our businesses, fluctuations in product prices, working capital requirements and general market conditions. Net cash provided by operating activities was$312.5 million ,$94.4 million and$168.9 million for 2020, 2019 and 2018, respectively, for a year-over-year increase in cash flow from operating activities of$218.1 million in 2020 and a decrease of$74.5 million in 2019. For 2018, cash flow from operating activities was not impacted by the non-cash gain of$52.6 million as a result of the extinguishment of a contingent liability related to the Volumetric Ethanol Excise Tax Credit. This gain was included in net income and offset by the corresponding decrease in the liability which had historically been included in trustee taxes (see Note 2 of Notes to Consolidated Financial Statements).
Except for net income, the primary drivers of the changes in operating
activities include the following for the years ended
2020 2019 Change 2019 2018 Change
Decrease (increase) in accounts
receivable $ 185,168 $ (78,978) $ 264,146 $ (78,978) $ 81,898 $ (160,876)
Decrease (increase) in
inventories $ 65,588 $ (64,790) $ 130,378 $ (64,790) $ (29,778) $ (35,012)
(Decrease) increase in accounts
payable $ (165,513) $ 64,407 $ (229,920) $ 64,407 $ (4,433) $ 68,840
(Increase) decrease in
derivatives $ (12,635) $ 30,030 $ (42,665) $ 30,030 (31,764) $ 61,794
In 2020, the decreases in accounts receivable, inventories and accounts payable
are largely due to the decrease in prices, primarily caused by the COVID-19
pandemic and geopolitical events. The increase in operating cash flow was also
impacted by the year-over-year change in derivatives of $42.7 million due to
market direction.
In 2019, the increases in accounts receivable, inventories and accounts payable
were primarily due to higher prices. The decrease in operating cash flow was
also impacted by the year-over-year change in derivatives of $61.8 million due
to market direction.
In 2018, the decrease in accounts receivable was due largely to the take-or-pay
receivable with one particular crude oil contract customer at December 31, 2017
that was not recognized at December 31, 2018 . The increase in inventories was
due to higher inventory volume.
Investing Activities
Net cash used in investing activities was$69.7 million for 2020 and included$47.0 million in maintenance capital expenditures,$29.3 million in expansion capital expenditures and$1.6 million in seller note issuances, offset by$8.2 million in proceeds from the sale of property and equipment. The seller note issuances represent notes we, the seller, received from buyers in connection with the sale of certain of our gasoline stations. Net cash used in investing activities was$67.2 million for 2019 and included$49.9 million in maintenance capital expenditures,$33.0 million in expansion capital expenditures and$1.4 million in seller note issuances, offset by$17.1 million in proceeds from the sale of property and equipment. 81
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Net cash used in investing activities was$225.7 million for 2018 and included$138.2 million and$33.4 million in cash used to fund the acquisitions of Champlain and Cheshire, respectively, including inventory,$38.6 million in maintenance capital expenditures,$30.6 million in expansion capital expenditures and$3.3 million in seller note issuances, offset by$18.4 million in proceeds from the sale of property and equipment.
Please read "-Capital Expenditures" for a discussion of our expansion capital
expenditures for the years ended
Financing Activities
Net cash used in financing activities was$245.1 million for 2020 and included$306.5 million in payments in connection with the redemption of the 2023 Notes and the issuance of the 2029 Notes,$139.5 million in net payments on our working capital revolving credit facility primarily due to lower prices and an increase in net income,$71.3 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner,$70.7 million in net payments on our revolving credit facility,$1.6 million related to the acquisition of our noncontrolling interest atBasin Transload ,$0.3 million in the repurchase of common units pursuant to our repurchase program for future satisfaction of our LTIP obligations and$0.3 million in LTIP units withheld for tax obligations related to awards that vested in 2020. Net cash used in financing activities was offset by$344.7 million in proceeds in connection with the issuance of the 2029 Notes and$0.4 million in capital contributions from our noncontrolling interest atBasin Transload . Net cash used in financing activities was$23.3 million for 2019 and included$381.9 million in payments in connection with the repurchase of the 2022 Notes and the issuance of the 2027 Notes,$76.6 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner,$27.3 million in net payments on our revolving credit facility and$0.7 million in LTIP units withheld for tax obligations related to awards that vested in 2019. Net cash used in financing activities was offset by$392.6 million in proceeds in connection with the issuance of the 2027 Notes and$70.6 million in net borrowings from our working capital revolving credit facility in part due to higher prices. Net cash provided by financing activities was$50.1 million for 2018 and included$66.4 million in net proceeds from the issuance of the Series A preferred units,$26.6 million in net borrowings from our revolving credit facility and$24.0 million in borrowings from our working capital revolving credit facility, offset by$66.0 million in cash distributions to our limited partners (preferred and common unitholders) and our general partner and$0.8 million in LTIP units withheld for tax obligations related to awards that vested in 2018. 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 for 2020, 2019 and 2018.
Credit Agreement
Certain subsidiaries of ours, as borrowers, and we and certain of our subsidiaries, as guarantors, have a$1.17 billion senior secured credit facility. 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 .
There are two facilities under the credit agreement:
a working capital revolving credit facility to be used for working capital
? purposes and letters of credit in the principal amount equal to the lesser of
our borrowing base and
? a
purposes.
In addition, the credit agreement has an accordion feature whereby we may request on the same terms and
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conditions then applicable to the credit agreement, provided no Event of Default (as defined in the credit agreement) then exists, an increase to the working capital revolving credit facility, the revolving credit facility, or both, by up to another$300.0 million , in the aggregate, for a total credit facility of up to$1.47 billion . Any such request for an increase must be in a minimum amount of$25.0 million . We cannot provide assurance, however, that our lending group will agree to fund any request by us for additional amounts in excess of the total available commitments of$1.17 billion . In addition, the credit agreement includes a swing line pursuant to whichBank of America, N.A ., as the swing line lender, may make swing line loans inU.S. dollars in an aggregate amount equal to the lesser of (a)$75.0 million and (b) the Aggregate WC Commitments (as defined in the credit agreement). Swing line loans will bear interest at the Base Rate (as defined in the credit agreement). The swing line is a sub-portion of the working capital revolving credit facility and is not an addition to the total available commitments of$1.17 billion . Availability under the working capital revolving credit facility is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets. Under the credit agreement, borrowings under the working capital revolving credit facility cannot exceed the then current borrowing base. 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. These and other events could require us to seek waivers or amendments of covenants or alternative sources of financing or to reduce expenditures. We can provide no assurance that such waivers, amendments or alternative financing could be obtained or, if obtained, would be on terms acceptable to us. Borrowings under the working capital revolving credit facility bear interest at (1) the Eurocurrency rate subject to a floor of 0.75% plus 2.125% to 2.625%, (2) the cost of funds rate subject to a floor of 0.50% plus 2.125% to 2.625%, or (3) the base rate plus 1.125% to 1.625%, each depending on the Utilization Amount (as defined in the credit agreement). Borrowings under the revolving credit facility bear interest at (1) the Eurocurrency rate subject to a floor of 0.75% plus 1.75% to 3.25%, (2) the cost of funds rate subject to a floor of 0.50% plus 1.75% to 3.25%, or (3) the base rate plus 0.75% to 2.25%, each depending on the Combined Total Leverage Ratio (as defined in the credit agreement).
The average interest rates for the credit agreement were 2.9%, 4.3% and 4.0% for
the years ended
OnJuly 27, 2017 , theU.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Under our credit agreement, if a comparable or successor rate to LIBOR is approved byBank of America, N.A ., in its capacity as administrative agent under our credit agreement, the approved rate will be applied in a manner consistent with market practice. To the extent market practice is not administratively feasible for the administrative agent, the approved rate will be applied in a manner otherwise reasonably determined by the administrative agent. We currently do not expect the transition from LIBOR to have a material impact on us. However, if clear market standards and replacement methodologies have not developed as of the time LIBOR becomes unavailable, we may have difficulty reaching agreement on acceptable replacement rates under our credit agreement. In the event that we do not reach agreement on an acceptable replacement rate for LIBOR, outstanding borrowings under the credit agreement denominated inU.S. dollars would revert to a floating rate equal to the base rate (which is equal to the greatest of the administrative agent's prime rate, the Federal Funds effective rate plus 0.50%, or 1-month LIBOR plus 1.00%) plus the applicable margin applicable to the alternative base rate which is currently equal to between 0.75% and 1.75%. If we are unable to negotiate replacement rates on favorable terms, it could have a material adverse effect on our financial condition, results of operations and cash distributions to unitholders. The credit agreement provides for a letter of credit fee equal to the then applicable working capital rate or then applicable revolver rate (each such rate as defined in the credit agreement) per annum for each letter of credit issued. In addition, we incur a commitment fee on the unused portion of each facility under the credit agreement, ranging from 0.35% to 0.50% per annum.
As of
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The credit agreement is secured by substantially all of our assets and the assets of our wholly owned subsidiaries and is guaranteed by us and our subsidiaries,Bursaw Oil LLC , Global Partners Energy Canada ULC,Warex Terminals Corporation ,Drake Petroleum Company, Inc. ,Puritan Oil Company, Inc. ,Maryland Oil Company, Inc. andBasin Transload, LLC . The credit agreement also includes certain baskets, including (i) a$25.0 million general secured indebtedness basket, (ii) a$25.0 million general investment basket, (iii) a$75.0 million secured indebtedness basket to permit the borrowers to enter into a Contango Facility (as defined in the credit agreement), (iv) a Sale/Leaseback Transaction (as defined in the credit agreement) basket of$100.0 million , and (v) a basket of$50.0 million in an aggregate amount for the purchase of our common units, provided that no Event of Default exists or would occur immediately following such purchase(s). In addition, the credit agreement provides the ability for the borrowers to repay certain junior indebtedness, subject to a$100.0 million cap, so long as no Event of Default has occurred or will exist immediately after making such repayment. 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 atDecember 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). Senior Notes 6.875% Senior Notes Due 2029 OnOctober 7, 2020 , the Issuers issued$350.0 million aggregate principal amount of 6.875% senior notes due 2029 to the 2029 Notes Initial Purchasers in a private placement exempt from the registration requirements under the Securities Act. We used the net proceeds from the offering to fund the redemption of the 2023 Notes and to repay a portion of the borrowings outstanding under our credit agreement. The redemption of the 2023 Notes occurred onOctober 23, 2020 .
As a result of the redemption of the 2023 Notes, we recorded a
2029 Notes Indenture
In connection with the private placement of the 2029 Notes onOctober 7, 2020 , the Issuers and the subsidiary guarantors andRegions Bank , as trustee, entered into an indenture as supplemented by the First Supplemental Indenture datedOctober 28, 2020 (the "2029 Notes Indenture"). The 2029 Notes mature onJanuary 15, 2029 with interest accruing at a rate of 6.875% per annum. Interest is payable beginningJuly 15, 2021 and thereafter semi-annually in arrears onJanuary 15 andJuly 15 of each year. The 2029 Notes are guaranteed on a joint and several senior unsecured basis by each of the Issuers and the subsidiary guarantors to the extent set forth in the 2029 Notes Indenture. Upon a continuing event of default, the trustee or the holders of at least 25% in principal amount of the 2029 Notes may declare the 2029 Notes immediately due and payable, except that an event of default resulting from entry into a bankruptcy, insolvency or reorganization with respect to the 84
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Issuers, any restricted subsidiary of ours that is a significant subsidiary or any group of our restricted subsidiaries that, taken together, would constitute a significant subsidiary of ours, will automatically cause the 2029 Notes to become due and payable. The Issuers have the option to redeem up to 35% of the 2029 Notes prior toOctober 15, 2023 at a redemption price (expressed as a percentage of principal amount) of 106.875% plus accrued and unpaid interest, if any. The Issuers have the option to redeem the 2029 Notes, in whole or in part, at any time on or afterJanuary 15, 2024 , at the redemption prices of 103.438% for the twelve-month period beginning onJanuary 15, 2024 , 102.292% for the twelve-month period beginningJanuary 15, 2025 , 101.146% for the twelve-month period beginningJanuary 15, 2026 , and 100% beginning onJanuary 15, 2027 and at any time thereafter, together with any accrued and unpaid interest to the date of redemption. In addition, prior toJanuary 15, 2024 , the Issuers may redeem all or any part of the 2029 Notes at a redemption price equal to the sum of the principal amount thereof, plus a make whole premium, plus accrued and unpaid interest, if any, to the redemption date. The holders of the 2029 Notes may require the Issuers to repurchase the 2029 Notes following certain asset sales or a Change of Control Triggering Event (as defined in the 2029 Notes Indenture) at the prices and on the terms specified in the 2029 Notes Indenture. The 2029 Notes Indenture contains covenants that limit our ability to, among other things, incur additional indebtedness and issue preferred securities, make certain dividends and distributions, make certain investments and other restricted payments, restrict distributions by its subsidiaries, create liens, sell assets or merge with other entities. Events of default under the 2029 Notes Indenture include (i) a default in payment of principal of, or interest or premium, if any, on, the 2029 Notes, (ii) breach of our covenants under the 2029 Notes Indenture, (iii) certain events of bankruptcy and insolvency, (iv) any payment default or acceleration of indebtedness of ours or certain subsidiaries if the total amount of such indebtedness unpaid or accelerated exceeds$50.0 million and (v) failure to pay within 60 days uninsured final judgments exceeding$50.0 million .
2029 Notes Registration Rights Agreement
OnOctober 7, 2020 , the Issuers and the subsidiary guarantors entered into a registration rights agreement (the "2029 Notes Registration Rights Agreement") with the 2029 Notes Initial Purchasers in connection with the Issuers' private placement of the 2029 Notes. Pursuant to the 2029 Notes Registration Rights Agreement, the Issuers and the subsidiary guarantors completed an exchange of the 2029 Notes for an issue of notes with terms identical to the 2029 Notes (except that the exchange notes will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the 2029 Notes Registration Rights Agreement) that are registered under the Securities Act onFebruary 1, 2021 . All of the 2029 Notes were exchanged forSEC -registered notes.
7.00% Senior Notes Due 2027
OnJuly 31, 2019 , the Issuers issued$400.0 million aggregate principal amount of 7.00% senior notes due 2027 to the 2027 Notes Initial Purchasers in a private placement exempt from the registration requirements under the Securities Act. We used the net proceeds from the offering to fund the repurchase of the 2022 Notes in a tender offer and to repay a portion of the borrowings outstanding under our credit agreement. The redemption of the 2022 Notes occurred onAugust 30, 2019 . As a result of the repurchase of the 2022 Notes, we recorded a$13.1 million loss from early extinguishment of debt for the year endedDecember 31, 2019 , consisting of a$6.9 million cash call premium and a$6.2 million non-cash write-off of remaining unamortized original issue discount and deferred financing fees.
2027 Notes Indenture
In connection with the private placement of the 2027 Notes onJuly 31, 2019 , the Issuers and the subsidiary guarantors andRegions Bank (as successor trustee toDeutsche Bank Trust Company Americas ), as trustee, entered into 85
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an indenture as supplemented by the First Supplemental Indenture dated
The 2027 Notes will mature onAugust 1, 2027 with interest accruing at a rate of 7.00% per annum and payable semi-annually in arrears onFebruary 1 andAugust 1 of each year, commencingFebruary 1, 2020 . The 2027 Notes are guaranteed on a joint and several senior unsecured basis by each of the Issuers and the subsidiary guarantors to the extent set forth in the 2027 Notes Indenture. Upon a continuing event of default, the trustee or the holders of at least 25% in principal amount of the 2027 Notes may declare the 2027 Notes immediately due and payable, except that an event of default resulting from entry into a bankruptcy, insolvency or reorganization with respect to the Issuers, any restricted subsidiary of ours that is a significant subsidiary or any group of our restricted subsidiaries that, taken together, would constitute a significant subsidiary of ours, will automatically cause the 2027 Notes to become due and payable. Prior toAugust 1, 2022 , the Issuers have the option to redeem up to 35% of the 2027 Notes in an amount not greater than the net cash proceeds of certain equity offerings at a redemption price (expressed as a percentage of principal amount) of 107% plus accrued and unpaid interest, if any. The Issuers have the option to redeem the 2027 Notes, in whole or in part, at any time on or afterAugust 1, 2022 , at the redemption prices of 103.500% for the twelve-month period beginning onAugust 1, 2022 , 102.333% for the twelve-month period beginningAugust 1, 2023 , 101.167% for the twelve-month period beginningAugust 1, 2024 , and 100% beginning onAugust 1, 2025 and at any time thereafter, together with any accrued and unpaid interest to the date of redemption. In addition, prior toAugust 1, 2022 , the Issuers may redeem all or any part of the 2027 Notes at a redemption price equal to the sum of the principal amount thereof, plus a make whole premium, plus accrued and unpaid interest, if any, to the redemption date. The holders of the 2027 Notes may require the Issuers to repurchase the 2027 Notes following certain asset sales or a Change of Control Triggering Event (as defined in the 2027 Notes Indenture) at the prices and on the terms specified in the 2027 Notes Indenture. The 2027 Notes Indenture contains covenants that will limit our ability to, among other things, incur additional indebtedness and issue preferred securities, make certain dividends and distributions, make certain investments and other restricted payments, restrict distributions by our subsidiaries, create liens, sell assets or merge with other entities. Events of default under the 2027 Notes Indenture include (i) a default in payment of principal of, or interest or premium, if any, on, the 2027 Notes, (ii) breach of our covenants under the 2027 Notes Indenture, (iii) certain events of bankruptcy and insolvency, (iv) any payment default or acceleration of indebtedness of ours or certain subsidiaries if the total amount of such indebtedness unpaid or accelerated exceeds$50.0 million and (v) failure to pay within 60 days uninsured final judgments exceeding$50.0 million .
Financing Obligations
Capitol Acquisition
OnJune 1, 2015 , we acquired retail gasoline stations and dealer supply contracts fromCapitol Petroleum Group ("Capitol"). In connection with the acquisition, we assumed a financing obligation of$89.6 million associated with two sale-leaseback transactions byCapitol for 53 leased sites that did not meet the criteria for sale accounting. During the terms of these leases, which expire inMay 2028 andSeptember 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$9.3 million ,$9.3 million and$9.4 million was recorded for the years endedDecember 31, 2020 , 2019 and 2018, respectively, and 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$10.1 million ,$9.9 million and$9.7 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The financing obligation balance outstanding atDecember 31, 2020 was$86.1 million associated with theCapitol acquisition.
Sale-Leaseback Transaction
On
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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"). The Master Unitary
Lease Agreement provides for an initial term of fifteen years that expires in
2031. We have one successive option to renew the lease for a ten-year period
followed by two successive options to renew the lease for five-year periods on
the same terms, covenants, conditions and rental as the primary non-revocable
lease term. We do not have any residual interest nor the option to repurchase
any of the sites at the end of the lease term. The proceeds from the
Sale-Leaseback Transaction were used to reduce indebtedness outstanding under
our revolving credit facility.
The sale did not meet the criteria for sale accounting as of December 31, 2020
due to prohibited continuing involvement. Specifically, the sale is considered a
partial-sale transaction, which is a form of continuing involvement as we did
not transfer to the Buyer the storage tank systems which are considered integral
equipment of the Sale-Leaseback Sites. Additionally, a portion of the sold sites
have material sub-lease arrangements, which is also a form of continuing
involvement. As the sale of the Sale-Leaseback Sites did not meet the criteria
for sale accounting, we did not recognize a gain or loss on the sale of the
Sale-Leaseback Sites for the year ended December 31, 2020 .
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. Interest expense was $4.3 million , $4.4 million and $4.4 million for
the years ended December 31, 2020 , 2019 and 2018, respectively, and lease rental
payments were $4.7 million , $4.6 million and $4.5 million for the years ended
December 31, 2020 , 2019 and 2018, respectively. The financing obligation balance
outstanding at December 31, 2020 was $62.0 million associated with the
Sale-Leaseback Transaction.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Impact of Inflation
Inflation has been relatively low in recent years and did not have a material impact on our results of operations for the years endedDecember 31, 2020 ,
2019 and 2018. Environmental Matters Our businesses of purchasing, storing, supplying and distributing refined petroleum products, gasoline blendstocks, renewable fuels, crude oil and propane and other business activities, involves a number of activities that are subject to extensive and stringent environmental laws. For a complete discussion of the environmental laws and regulations affecting our businesses, please read Items 1 and 2, "Business and Properties-Environmental." For additional information regarding our environmental liabilities, see Note 14 of Notes to Consolidated Financial Statements included elsewhere in this report.
Critical Accounting Policies and Estimates
A summary of the significant accounting policies that we have adopted and
followed in the preparation of our consolidated financial statements is detailed
in Note 2 of Notes to Consolidated Financial Statements. Certain of these
accounting policies require the use of estimates. 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
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impact on our financial condition and results of operations and are recorded in the period in which they become known. The COVID-19 pandemic 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. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis:
Inventory
We hedge substantially all of our petroleum and ethanol inventory using a variety of instruments, primarily exchange-traded futures contracts. These futures contracts are entered into when inventory is purchased and are either designated as fair value hedges against the inventory on a specific barrel basis for inventories qualifying for fair value hedge accounting or not designated and maintained as economic hedges against certain inventory of ours on a specific barrel basis. Changes in fair value of these futures contracts, as well as the offsetting change in fair value on the hedged inventory, are recognized in earnings as an increase or decrease in cost of sales. All hedged inventory designated in a fair value hedge relationship is valued using the lower of cost, as determined by specific identification, or net realizable value, as determined at the product level. All petroleum and ethanol inventory not designated in a fair value hedging relationship is carried at the lower of historical cost, on a first-in, first-out basis, or net realizable value. RIN inventory is carried at the lower of historical cost, on a first-in, first-out basis, or net realizable value. Convenience store inventory is carried at the lower of historical cost, based on a weighted average cost method, or net realizable value. In addition to our own inventory, we have exchange agreements for petroleum products and ethanol with unrelated third-party suppliers, whereby we may draw inventory from these other suppliers and suppliers may draw inventory from us. Positive exchange balances are accounted for as accounts receivable. Negative exchange balances are accounted for as accounts payable. Exchange transactions are valued using current carrying costs.
Leases
We have gasoline station and convenience store leases, primarily of land and buildings. We have terminal and dedicated storage facility lease arrangements with various petroleum terminals and third parties, of which certain arrangements have minimum usage requirements. We lease barges through various time charter lease arrangements and railcars through various lease arrangements. We also have leases for office space, computer and convenience store equipment and automobiles. Our lease arrangements have various expiration dates with options to extend.
We are also the lessor party to various lease arrangements with various expiration dates, including the leasing of gasoline stations and certain equipment to third-party station operators and cobranding lease agreements for certain space within our gasoline stations and convenience stores.
In addition, we are party to three master unitary lease agreements in connection with (i) theJune 2015 acquisition of retail gasoline stations fromCapitol related to properties previously sold byCapitol within two sale-leaseback transactions; and (ii) theJune 2016 sale of real property assets at 30 gasoline stations and convenience stores that did not meet the criteria for sale accounting. These transactions continue to be accounted for as financing obligations upon transition to ASC 842, "Leases," which we adopted onJanuary 1, 2019 . Accounting and reporting guidance for leases requires that leases be evaluated and classified as either operating or finance leases by the lessee and as either operating, sales-type or direct financing leases by the lessor. Our operating leases are included in right-of-use ("ROU") assets, lease liability-current portion and long-term lease liability-less current portion in the accompanying consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our variable lease payments 88
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consist of payments that depend on an index or rate (such as the Consumer Price Index) as well as those payments that depend on our performance or use of the underlying asset related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate in determining the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. ROU assets also include any lease payments made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which are not included in the minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Rental income for lease payments received related to operating leases is recognized on a straight-line basis over the lease term.
We have elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term.
Our leases have contracted terms as follows:
Gasoline station and convenience store leases 1-20 years Terminal lease arrangements 1-5 years Dedicated storage facility leases 1-5 years Barge and railcar equipment leases 1-10 years Office space leases
1-12 years Computer equipment, convenience store equipment and automobile leases 1-5 years
The above table excludes ourWest Coast facility land lease arrangement which contract term is subject to expiration throughJuly 2066 . Some of the above leases include options to extend the leases for up to an additional 30 years. We do not include renewal options in our lease terms for calculating the lease liability unless we are reasonably certain the renewal options are to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Revenue Recognition
Our sales relate primarily to the sale of refined petroleum products, gasoline
blendstocks, renewable fuels and crude oil are recognized along with the related
receivable upon delivery, net of applicable provisions for discounts and
allowances. We may also provide for shipping costs at the time of sale, which
are included in cost of sales.
Contracts with customers typically contain pricing provisions that are tied to a
market index, with certain adjustments based on quality and freight due to
location differences and prevailing supply and demand conditions, as well as
other factors. As a result, the price of the products fluctuates to remain
competitive with other available product supplies. The revenue associated with
such arrangements is recognized upon delivery.
In addition, we generate revenue from our logistics activities when we store,
transload and ship products owned by others. Revenue from logistics services is
recognized as services are provided.
Logistics agreements may require counterparties to throughput a minimum volume
over an agreed-upon period and may include make-up rights if the minimum volume
is not met. We recognize revenue associated with make-up rights at the earlier
of when the make-up volume is shipped, the make-up right expires or when it is
determined that the likelihood that the shipper will utilize the make-up right
is remote.
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We also recognize convenience store sales of gasoline, grocery and other merchandise and sundries at the time of the sale to the customer. Gasoline station rental income is recognized on a straight-line basis over the term of the lease.
Product revenue is not recognized on exchange agreements, which are entered into primarily to acquire various refined petroleum products, gasoline blendstocks, renewable fuels and crude oil of a desired quality or to reduce transportation costs by taking delivery of products closer to our end markets. We recognize net exchange differentials due from exchange partners in sales upon delivery of product to an exchange partner. We recognize net exchange differentials due to exchange partners in cost of sales upon receipt of product from an exchange partner. The amounts recorded for bad debts are generally based upon a specific analysis of aged accounts while also factoring in any new business conditions that might impact the historical analysis, such as market conditions and bankruptcies of particular customers. Bad debt provisions are included in selling, general
and administrative expenses. Trustee Taxes We collect trustee taxes, which consist of various pass through taxes collected on behalf of taxing authorities, and remit such taxes directly to those taxing authorities. Examples of trustee taxes include, among other things, motor fuel excise tax and sales and use tax. As such, it is our policy to exclude trustee taxes from revenues and cost of sales and account for them as current liabilities. We may be subject to audits of our state and federal tax returns prepared for trustee taxes.
Derivative Financial Instruments
We principally use derivative instruments, which include regulated
exchange-traded futures and options contracts (collectively, "exchange-traded
derivatives") and physical and financial forwards and over-the counter ("OTC")
swaps (collectively, "OTC derivatives"), to reduce our exposure to unfavorable
changes in commodity market prices. We use these exchange-traded and OTC
derivatives to hedge commodity price risk associated with our inventory, fuel
purchases and undelivered forward commodity purchases and sales ("physical
forward contracts"). We account for derivative transactions in accordance with
ASC Topic 815, "Derivatives and Hedging," and recognize derivatives instruments
as either assets or liabilities in the consolidated balance sheet and measure
those instruments at fair value. The changes in fair value of the derivative
transactions are presented currently in earnings, unless specific hedge
accounting criteria are met.
The fair value of exchange-traded derivative transactions reflects amounts that
would be received from or paid to our brokers upon liquidation of these
contracts. The fair value of these exchange-traded derivative transactions is
presented on a net basis, offset by the cash balances on deposit with our
brokers, presented as brokerage margin deposits in the consolidated balance
sheets. The fair value of OTC derivative transactions reflects amounts that
would be received from or paid to a third party upon liquidation of these
contracts under current market conditions. The fair value of these OTC
derivative transactions is presented on a gross basis as derivative assets or
derivative liabilities in the consolidated balance sheets, unless a legal right
of offset exists. The presentation of the change in fair value of our
exchange-traded derivatives and OTC derivative transactions depends on the
intended use of the derivative and the resulting designation.
Derivatives Accounted for as Hedges-We utilize fair value hedges and cash flow hedges to hedge commodity price risk.
Fair Value Hedges
Derivatives designated as fair value hedges are used to hedge price risk in commodity inventories and principally include exchange-traded futures contracts that are entered into in the ordinary course of business. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting change in fair value on the hedged item of the risk being hedged. Gains and losses related
to
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fair value hedges are recognized in the consolidated statements of operations
through cost of sales. These futures contracts are settled on a daily basis by
us through brokerage margin accounts.
Our fair value hedges include exchange-traded futures contracts and OTC
derivative contracts that are hedges against inventory with specific futures
contracts matched to specific barrels. The change in fair value of these futures
contracts and the change in fair value of the underlying inventory generally
provide an offset to each other in the consolidated statement of operations.
Cash Flow Hedges
Our sales and cost of sales fluctuate with changes in commodity prices. In addition to our commodity price risk associated with our inventory and undelivered forward commodity purchases and sales, our gross profit may fluctuate in periods where commodity prices are rising or declining depending on the magnitude and duration of the commodity price change. In our GDSO segment, we have observed trends where margins may improve in periods where wholesale gasoline prices are declining and margins may compress during periods where wholesale gasoline prices are rising. Additionally, we have certain operating costs that are indirectly impacted by fluctuations in commodity prices such that our operating costs may increase during periods where margins compress and, conversely, operating costs may decrease during periods where margins improve. To hedge our cash flow risk as a result of this observed trend in the GDSO segment, we entered into exchange-traded commodity swap contracts and designated them as a cash flow hedge of our fuel purchases designed to reduce our cost of fuel if market prices rise through 2021 or increase our cost of fuel if market prices decrease through 2021. For a derivative instrument being designated as a cash flow hedge, the effective portion of the derivative gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into the consolidated statement of income through cost of goods sold in the same period that the hedged exposure affects earnings.
Derivatives Not Accounted for as Hedges-We utilize petroleum and ethanol commodity contracts to hedge price and currency risk in certain commodity inventories and physical forward contracts.
Petroleum and Ethanol Commodity Contracts
We use exchange-traded derivative contracts to hedge price risk in certain commodity inventories which do not qualify for fair value hedge accounting or are not designated by us as fair value hedges. Additionally, we use exchange-traded derivative contracts, and occasionally financial forward and OTC swap agreements, to hedge commodity price exposure associated with our physical forward contracts which are not designated by us as cash flow hedges. These physical forward contracts, to the extent they meet the definition of a derivative, are considered OTC physical forwards and are reflected as derivative assets or derivative liabilities in the consolidated balance sheet. The related exchange-traded derivative contracts (and financial forward and OTC swaps, if applicable) are also reflected as brokerage margin deposits (and derivative assets or derivative liabilities, if applicable) in the consolidated balance sheet, thereby creating an economic hedge. Changes in fair value of these derivative instruments are recognized in the consolidated statement of operations through cost of sales. These exchange traded derivatives are settled on a daily basis by us through brokerage margin accounts. While we seek to maintain a position that is substantially balanced within our commodity product purchase and sale activities, we may experience net unbalanced positions for short periods of time as a result of variances in daily purchases and sales and transportation and delivery schedules as well as other logistical issues inherent in our businesses, such as weather conditions. In connection with managing these positions, we are aided by maintaining a constant presence in the marketplace. We also engage in a controlled trading program for up to an aggregate of 250,000 barrels of commodity products at any one point in time. Changes in fair value of these derivative instruments are recognized in the consolidated statements of operations through cost of sales.
Margin Deposits
All of our exchange-traded derivative contracts (designated and not designated) are transacted through clearing brokers. We deposit initial margin with the clearing brokers, along with variation margin, which is paid or received on a
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daily basis, based upon the changes in fair value of open futures contracts and
settlement of closed futures contracts. Cash balances on deposit with clearing
brokers and open equity are presented on a net basis within brokerage margin
deposits in the consolidated balance sheets.
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. We have concluded that our operating segments are also our reporting units.Goodwill is tested for impairment annually as ofOctober 1 or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Derecognized goodwill associated with our disposition activities of GDSO sites is included in the carrying value of assets sold in determining the gain or loss on disposal, to the extent the disposition of assets qualifies as a disposition of a business under ASC 805. The GDSO reporting unit's goodwill that was derecognized related to the disposition of sites that met the definition of a business was$0.9 million ,$2.9 million and$3.9 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively (see Note 7 of Notes to Consolidated Financial Statements). All of our goodwill is allocated to the GDSO segment. During 2020, 2019 and 2018, we completed a quantitative assessment for the GDSO reporting unit. Factors included in the assessment included both macro-economic conditions and industry specific conditions, and the fair value of the GDSO reporting unit was estimated using a weighted average of a discounted cash flow approach and a market comparables approach. Based on our assessment, no impairment was identified.
Evaluation of Long-Lived Asset Impairment
Accounting and reporting guidance for long-lived assets requires that a long-lived asset (group) be reviewed for impairment when events or changes in circumstances indicate that the carrying amount might not be recoverable. Accordingly, we evaluate long-lived assets for impairment whenever indicators of impairment are identified. If indicators of impairment are present, we assess impairment by comparing the undiscounted projected future cash flows from the long-lived assets to their carrying value. If the undiscounted cash flows are less than the carrying value, the long-lived assets will be reduced to their fair value.
Environmental and Other Liabilities
We record accrued liabilities for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Costs accrued are estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes. Estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Loss accruals are adjusted as further information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recognized when related contingencies are resolved, generally upon cash receipt. We are subject to other contingencies, including legal proceedings and claims arising out of our businesses that cover a wide range of matters, including, environmental matters and contract and employment claims. Environmental and other legal proceedings may also include matters with respect to businesses previously owned. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.
Recent Accounting Pronouncements
A description and related impact expected from the adoption of certain new accounting pronouncements is provided in Note 2 of Notes to Consolidated Financial Statements included elsewhere in this report.
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