UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

Commission file number 001-32593

 

Global Partners LP

(Exact name of registrant as specified in its charter)

 

 

P.O. Box 9161
800 South Street
Waltham, Massachusetts 02454-9161
(Address of principal executive offices, including zip code)

 

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

 

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

 

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

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The issuer had 33,995,563 common units outstanding as of November 3, 2016.

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

Item 1.Financial Statements

 

GLOBAL PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

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

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)

(Unaudited)

 

 

 

 

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

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

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

 

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

6

 

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

GLOBAL PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

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

 

 

 

 

 

Note 1.    Organization and Basis of Presentation

 

Organization

 

Global Partners LP (the “Partnership”) is a midstream logistics and marketing master limited partnership formed in March 2005 engaged in the purchasing, selling, storing and logistics of transporting petroleum and related products, including domestic and Canadian crude oil, gasoline and gasoline blendstocks (such as ethanol), distillates (such as home heating oil, diesel and kerosene), residual oil, renewable fuels, natural gas and propane.  The Partnership also receives revenue from convenience store sales and gasoline station rental income.  The Partnership owns, controls or has access to one of the largest terminal networks of refined petroleum products and renewable fuels in Massachusetts, Maine, Connecticut, Vermont, New Hampshire, Rhode Island, New York, New Jersey and Pennsylvania (collectively, the “Northeast”).  The Partnership owns transload and storage terminals in North Dakota and Oregon that extend its origin-to-destination capabilities from the mid-continent region of the United States and Canada to the East and West Coasts.  The Partnership is one of the largest distributors of gasoline, distillates, residual oil and renewable fuels to wholesalers, retailers and commercial customers in the New England states and New York.  As of September 30, 2016, the Partnership had a portfolio of 1,472 owned, leased and/or supplied gasoline stations, including 257 directly operated convenience stores, in the Northeast, Maryland and Virginia.

 

Global GP LLC, the Partnership’s general partner (the “General Partner”), manages the Partnership’s operations and activities and employs its officers and substantially all of its personnel, except for most of its gasoline station and convenience store employees who are employed by Global Montello Group Corp. (“GMG”).

 

The General Partner, which holds a 0.67% general partner interest in the Partnership, is owned by affiliates of the Slifka family.  As of September 30, 2016, affiliates of the General Partner, including its directors and executive officers and their affiliates, owned 7,433,829 common units, representing a 21.9% limited partner interest.

 

Recent Transaction

 

Sale of Gasoline Stations—On August 22, 2016, Drake Petroleum Company, Inc., an indirect wholly owned subsidiary of the Partnership, sold to Mirabito Holdings, Inc. (“Mirabito”) 30 gasoline stations and convenience stores located in New York and Pennsylvania (the “Drake Sites”) for an aggregate total cash purchase price of approximately $40.0 million (the “Mirabito Disposition”).  The Drake Sites are a portion of the sites that were acquired by the Partnership in connection with the acquisition of Warren Equities, Inc. (“Warren”) in January 7, 2015 (see Note 2).  In connection with closing, the parties entered into long-term supply contracts for branded and unbranded gasoline and other petroleum products.  See Note 15.    

 

Basis of Presentation

 

On January 7, 2015, the Partnership acquired, through one of its wholly owned subsidiaries, GMG, 100% of the equity interests in Warren from The Warren Alpert Foundation.  On January 14, 2015, the Partnership acquired the Revere terminal (the “Revere Terminal”) located in Boston Harbor in Revere, Massachusetts from Global Petroleum Corp. (“GPC”) and related entities.  On June 1, 2015, the Partnership acquired, through one of its wholly owned subsidiaries, Alliance Energy LLC (“Alliance”), retail gasoline stations and dealer supply contracts from Capitol Petroleum Group (“Capitol”).  See Note 2.

 

The financial results of Capitol for the four months ended September 30, 2015 are included in the accompanying statement of operations for the nine months ended September 30, 2015.  The financial results of Warren and the Revere Terminal for the nine months ended September 30, 2015 are included in the accompanying statement of operations for

the nine months ended September 30, 2015.  The accompanying consolidated financial statements as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015 reflect the accounts of the Partnership.  Upon consolidation, all intercompany balances and transactions have been eliminated.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition and operating results for the interim periods.  The interim financial information, which has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), should be read in conjunction with the consolidated financial statements for the year ended December 31, 2015 and notes thereto contained in the Partnership’s Annual Report on Form 10-K.  The significant accounting policies described in Note 2, “Summary of Significant Accounting Policies,” of such Annual Report on Form 10-K are the same used in preparing the accompanying consolidated financial statements.

 

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2016.  The consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

Noncontrolling Interest

 

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

 

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

 

Concentration of Risk

 

The following table presents the Partnership’s product sales and other revenues as a percentage of the consolidated sales for the periods presented:

 

 

The following table presents the Partnership’s product margin by segment as a percentage of the consolidated product margin for the periods presented:

 

 

See Note 10, “Segment Reporting,” for additional information on the Partnership’s operating segments.

 

None of the Partnership’s customers accounted for greater than 10% of total sales for the three and nine months ended September 30, 2016 and 2015. 

 

Goodwill and Long-Lived Asset Impairment

 

The following table presents goodwill and long-lived asset impairment charges recognized during the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

 

Goodwill

 

As disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015, the declining crude oil prices, changes in certain market conditions and decline in the Partnership’s common unit price, collectively caused the Partnership to reassess its goodwill allocated to the Wholesale reporting unit for impairment as of December 31, 2015.  The Partnership’s results in 2015 were impacted by tighter differentials as mid-continent crude oil did not discount sufficiently to make rail transport to the East Coast competitive with imports.  Certain of the key

assumptions in the development of discounted cash flows used to evaluate the Wholesale reporting unit, included the expectation of a recovery from tight differentials and low crude oil prices within 2017.  Based on the results of this assessment, the Partnership concluded that step two of the quantitative assessment was not necessary and no impairment was required at that time. 

 

During the first quarter ended March 31, 2016 and second quarter ended June 30, 2016, the Partnership considered whether there were any change of circumstances or events which would more likely than not reduce the fair value of the Wholesale segment’s reporting unit below its carrying amount.  While the Partnership had then concluded that such events and circumstances had not occurred, the Partnership disclosed the possibility that a continuation of low crude oil prices and tight differentials might cause the Partnership to conclude that the timing of a market recovery might be more extended than estimated within the Partnership’s five-year forecast and estimate of terminal values.

 

The Partnership further disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015 and in its Quarterly Reports on Forms 10-Q as of March 31, 2016 and June 30, 2016, that a further sustained decline in commodity prices may cause the Partnership to reassess its long-lived assets and goodwill for impairment, and could result in future non-cash impairment charges as a result of such impairment assessments.  If the Partnership is required to perform step two in the future for the Wholesale reporting unit, up to $121.7 million of goodwill assigned to this reporting unit could be written off in the period of such impairment assessment.

 

During the third quarter ended September 30, 2016, the Partnership continued to monitor the extent and timing of future demand.  Crude oil prices have remained at lower levels but, more importantly, tight differentials have continued such that the Partnership may no longer reasonably include an assumption that the market for crude oil by rail to the coasts might recover sometime within 2017 as previously expected.  Factors contributing to the Partnership’s assumption include: 

 

 

These current market conditions, in addition to declines noted during fiscal year 2015 as well as the first and second quarters of 2016, negatively affected the Partnership’s current period results and future projections sufficiently to constitute triggering events for the Wholesale reporting unit.  Based on its consideration of the factors above, the Partnership concluded it was necessary to perform an interim goodwill impairment test for the Wholesale reporting unit pursuant to the guidelines of ASC Topic 350, “Intangibles–Goodwill and Other” (“ASC 350”).  The Partnership did not extend the interim test for recoverability to the Gasoline Distribution and Station Operations (“GDSO”) reporting unit, as the indicators described above are specific to the Wholesale reporting unit.

 

The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty.  The impairment test includes either a qualitative assessment or a two-step quantitative assessment.  The impairment test’s qualitative assessment is used in order to conclude if it is more likely than not that the reporting unit’s fair value exceeds its carrying value.  Factors considered in the qualitative analysis include changes in the business and industry, as well as macro-economic conditions, that would influence the fair value of the reporting unit as well as changes in the carrying values of the reporting unit.  In the impairment test’s two step quantitative assessment, the fair value of each reporting unit is determined and compared to the book value of the reporting unit as determined under step one.  If the fair value of the reporting unit is less than the book value, including goodwill, then step two is performed to compare the carrying amount of reporting unit goodwill to the implied fair value of that goodwill.  If the carrying amount of reporting unit goodwill exceeds the implied fair value

of that goodwill, an impairment loss is recognized for that excess with a charge to operations.  The Partnership calculates the fair value of each reporting unit using a combination of discounted cash flows and market comparables.

 

Key assumptions included in the development of the discounted cash flow value for each reporting unit include:

 

Future commodity volumes and margins.  The discounted cash flows are based on a five-year forecast with an estimate of terminal values.  In general, the reporting units’ fair values are most sensitive to volume and gross margin assumptions.  The Wholesale reporting unit’s cash flows are significantly influenced by the crude oil market, given the Partnership’s 2013 investment in transloading terminals in North Dakota and Oregon.

 

Discount rate commensurate with the risks involved.  The Partnership applies a discount rate to its expected cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk.  A higher discount rate decreases the net present value of cash flows.

 

Future capital requirements.  The Partnership’s estimates of future capital requirements are based upon a combination of authorized spending and internal forecasts.

 

As of September 30, 2016, as a result of the impairment indicators discussed above, the Partnership completed a preliminary assessment of the impairment of the Wholesale reporting unit’s goodwill.  As a result of the step one assessment, the Partnership concluded that the fair value of the Wholesale reporting unit no longer exceeded its carrying value and as a result, performed a step two assessment to measure the impairment.  In step two of the quantitative assessment, the implied fair value of goodwill is determined by assigning the fair value of a reporting unit to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination.  If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for that excess.  Upon applying step two of the impairment test, the Partnership preliminarily determined that the implied fair value of the Wholesale reporting unit goodwill was $0, and accordingly the Partnership recorded an impairment charge of $121.7 million as of September 30, 2016, or all of the goodwill previously allocated to this reporting unit.

 

Due to the complexity of the analysis required to complete the step one and step two impairment tests and the timing of the Partnership’s determination of the goodwill impairment, the Partnership has not yet finalized its step one and step two impairment tests.  The Partnership has completed a preliminary assessment of the expected impact of the step one and step two impairment tests using reasonable estimates of discounted cash flows and for the theoretical purchase price allocation and has recorded a preliminary estimate of the goodwill impairment losses for the three and nine months ended September 30, 2016 of approximately $121.7 million.  The preliminary estimates of goodwill impairment losses will be finalized prior to the issuance of the Partnership’s Annual Report on Form 10-K for the year ending December 31, 2016 as part of its annual evaluation as of October 1.  The Partnership believes that the preliminary estimates of goodwill impairment losses are reasonable and represent the Partnership’s best estimate of the goodwill impairment losses to be incurred.

 

The following procedures are, among others, the more significant analyses that the Partnership needs to complete to finalize its year end step one and step two impairment tests:

 

 

In connection with the preliminary step two impairment test, the Partnership made what it considered to be reasonable estimates of each of the above items in order to determine its preliminary best estimate of the goodwill impairment loss under the theoretical purchase price allocation required for a step two impairment test. 

 

Judgments and assumptions are inherent in management’s estimates used to determine the fair value of the Partnership’s reporting units and are consistent with what management believes would be utilized by the primary market participant.  The use of alternate judgments and assumptions could result in the recognition of different levels of impairment charges in our financial statements.

 

The following table presents changes in goodwill by segment during the nine months ended September 30, 2016 (in thousands):

 

 

Goodwill associated with the Partnership’s disposition activities of GDSO sites will be 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.  As of September 30, 2016, GDSO goodwill of $13.6 million has been derecognized related to the disposition of a portfolio of sites for the three and nine months ended September 30, 2016 (see Note 15).

 

Evaluation of Long-Lived Asset Impairment

 

The Partnership evaluates its assets for impairment on a quarterly basis.  The Partnership recognized an impairment charge of $23.2 million for the three and nine months ended September 30, 2016 relating to long-lived assets used at its crude oil transloading terminals in North Dakota.  Additionally, the Partnership recognized an impairment charge of approximately $2.9 million for the three and nine months ended September 30, 2016 associated with certain long-lived assets at its Albany, New York terminal and development work in Port Arthur, Texas associated with the initial investments related to expanding the Partnership’s ability to handle crude oil at those locations.  The long-term recoverability of these assets has been adversely impacted by a prolonged decline in crude oil prices and crude oil differentials.  The method used for determining fair value of these assets predominately relied on a combination of the cost and market approaches.  These terminal assets are allocated to the Wholesale segment, and the total impairment charge of $26.1 million is included in goodwill and long-lived asset impairment in the accompanying statements of operations for the three and nine months ended September 30, 2016.

 

During the nine months ended September 30, 2016, the Partnership recognized an impairment charge of $1.9 million associated with the long-lived assets used in supplying compressed natural gas (“CNG”) which is viewed as an alternative fuel to oil.  The long-term recoverability of these assets has been adversely impacted by the decline in commodity prices and the cost differential between natural gas and oil.  As oil has remained an attractive alternative to CNG due to lower oil prices, the related impact on the CNG operating and cash flows was determined to be an

impairment indicator, resulting in the impairment of the CNG long-lived assets during the nine months ended September 30, 2016.  The method used for determining fair value of the CNG assets predominately relied on the market approach.  The CNG assets are allocated to the Commercial segment, and the impairment charge is included in goodwill and long-lived asset impairment in the accompanying statement of operations for the nine months ended September 30, 2016. 

 

Additionally, the Partnership recognized an impairment charge of $0.3 million for the nine months ended September 30, 2016 associated with the long-lived assets of one discrete GDSO site.  The method used for determining fair value of this GDSO site predominately relied on the market approach.  The impairment charge is included in goodwill and long-lived asset impairment in the accompanying statement of operations for the nine months ended September 30, 2016.    

 

Note 2.    Business Combinations

 

2015 Acquisitions

 

Warren Equities, Inc.—On January 7, 2015, the Partnership acquired, through GMG, 100% of the equity interests in Warren, one of the largest independent marketers of petroleum products in the Northeast, from The Warren Alpert Foundation.  The acquisition included 147 company-owned Xtra Mart convenience stores and related fuel operations, 53 commission agent locations and fuel supply rights for approximately 330 dealers.  The acquired properties are located in the Northeast, Maryland and Virginia.  The purchase price, inclusive of post-closing adjustments, was approximately $381.8 million, including working capital.  The acquisition was funded with borrowings under the Partnership’s credit facility and with proceeds from its December 2014 public offering of 3,565,000 common units.

 

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

 

In connection with the acquisition of Warren, the Partnership recorded acquisition costs of $0 and approximately $5.4 million for the three and nine months ended September 30, 2015, respectively, which are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.  Additionally, in January 2015 and subsequent to the acquisition date, the Partnership recorded a restructuring charge of approximately $2.3 million, which is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the nine months ended September 30, 2015. 

 

Revere Terminal—On January 14, 2015, through the Partnership’s wholly owned subsidiary, Global Companies LLC (“Global Companies”), the Partnership acquired the Revere Terminal located in Boston Harbor in Revere, Massachusetts from GPC, a privately held affiliate of the Partnership, and related entities for a purchase price of $23.7 million.  The acquisition includes contingent consideration which would be payable under specific circumstances involving a subsequent sale of the property during the eight years following the acquisition.  The contingent consideration was estimated to be $0 as of the acquisition date as the Partnership concluded that the sale of the terminal for non-petroleum use within the eight years following the acquisition is not probable.  There have been no changes to this assessment since the acquisition date.  The Partnership financed the transaction with borrowings under its revolving credit facility.  In connection with the Revere Terminal transaction, the pre-existing terminal storage rental and throughput agreement between the Partnership and GPC was terminated.

 

The acquisition was accounted for using the purchase method of accounting in accordance with the FASB’s guidance regarding business combinations.  As the acquisition transitioned the Revere Terminal from a formerly leased facility to an owned facility, the transaction did not have a material impact on the Partnership’s consolidated financial statements.

 

Capitol Petroleum Group—On June 1, 2015, the Partnership acquired 97 primarily Mobil and Exxon branded owned or leased retail gasoline stations and seven dealer supply contracts in New York City and Prince George’s County, Maryland, along with certain related supply and franchise agreements and third-party leases and other assets associated with the operations from Liberty Petroleum Realty, LLC, East River Petroleum Realty, LLC, Big Apple Petroleum Realty, LLC, White Oak Petroleum, LLC, Anacostia Realty, LLC, Mount Vernon Petroleum Realty, LLC and DAG Realty, LLC (collectively, “Capitol Petroleum Group”).  The purchase price was approximately $155.7 million.  The acquisition was financed with borrowings under the Partnership’s revolving credit facility.

 

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

 

In connection with the acquisition of Capitol, the Partnership incurred acquisition costs of approximately $0.1 million and $3.2 million which were recorded for the three and nine months ended September 30, 2015, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

 

Supplemental Pro Forma Information—Revenues and net income not included in the Partnership’s consolidated operating results for Warren from January 1, 2015 through January 7, 2015, the acquisition date, were immaterial.  Accordingly, the supplemental pro forma information for the nine months ended September 30, 2015 is consistent with the amounts reported in the accompanying consolidated statement of operations for the nine months ended September 30, 2015 as it relates to Warren. 

 

The following unaudited pro forma information presents the consolidated results of operations of the Partnership for the nine months ended September 30, 2015 as if the acquisition of Capitol occurred on January 1, 2015 (in thousands, except per unit data):

 

 

 

 

 

 

Note 3.    Net (Loss) Income Per Limited Partner Unit

 

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

 

Common units outstanding as reported in the accompanying consolidated financial statements at September 30, 2016 and December 31, 2015 excluded 462,161 and 488,719 common units, respectively, held on behalf of the Partnership pursuant to its repurchase program (see Note 13).  These units are not deemed outstanding for purposes of calculating net (loss) income per limited partner unit (basic and diluted).

 

The following table provides a reconciliation of net (loss) income and the assumed allocation of net (loss) income to the limited partners’ interest for purposes of computing net (loss) income per limited partner unit for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per unit data):

 

 

 

 

 

During 2016, the board of directors of the General Partner declared the following quarterly cash distributions:

 

 

See Note 8, “Partners’ Equity and Cash Distributions” for further information.

 

Note 4.    Inventories

 

The Partnership hedges substantially all of its petroleum and ethanol inventory using a variety of instruments, primarily exchange-traded futures contracts.  These futures contracts are entered into when inventory is purchased and are either designated as fair value hedges against the inventory on a specific barrel basis for inventories qualifying for fair value hedge accounting or not designated and maintained as economic hedges against certain inventory of the Partnership on a specific barrel basis.  Changes in fair value of these futures contracts, as well as the offsetting change in fair value on the hedged inventory, is 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 market, 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 market.