GLOBAL PARTNERS LP - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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FORM 10-Q

 

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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, 2015.

 

 

 

 

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 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 and logistics of transporting petroleum and related products, including domestic and Canadian crude oil, gasoline and gasoline blendstocks (such as ethanol and naphtha), 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, 2015, the Partnership had a portfolio of 1,530 owned, leased and/or supplied gasoline stations, including 285 directly operated convenience stores, in the Northeast, Maryland and Virginia.

 

On January 7, 2015, the Partnership acquired, through one of its wholly owned subsidiaries, Global Montello Group Corp. (“GMG”), 100% of the equity interests in Warren Equities, Inc. (“Warren”) from The Warren Alpert Foundation.  On January 14, 2015, through the Partnership’s wholly owned subsidiary, Global Companies LLC (“Global Companies”), 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 (defined below) (“Capitol”).  See Note 2.

 

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 and certain union personnel who are employed by GMG or Drake Petroleum Company, Inc. (“Drake Petroleum”), both of which are wholly owned subsidiaries of the Partnership.

 

The General Partner, which holds a 0.67% general partner interest in the Partnership (reduced from 0.74% following the Partnership’s public offering of common units discussed in Note 9), is owned by affiliates of the Slifka family.  As of September 30, 2015, affiliates of the General Partner, including its directors and executive officers and their affiliates, owned 8,315,095 common units, representing a 24.5% limited partner interest.

 

Ownership by affiliates of the General Partner decreased by approximately 3,425,202 common units (from 37.9% at December 31, 2014 to  24.5% at September 30, 2015), primarily as a result of the liquidation and dissolution of AE Holdings Corp. (“AE Holdings”) in March 2015.   Immediately prior to such liquidation and dissolution, the directors and executive officers of the General Partner were deemed to beneficially own the entire 5,850,000 common units that were then owned by AE Holdings.  Upon the liquidation and dissolution of AE Holdings, the 5,850,000 common units were distributed to the stockholders of AE Holdings.  An aggregate 1,956,234 common units were sold by the stockholders of AE Holdings to cover their projected respective tax liabilities resulting from their receipt of the common units.  Approximately 2,306,960 common units of the original 5,850,000 common units are held by certain of the directors and executive officers of the General Partner, and the remaining 1,586,806 common units are held by unaffiliated members of the Slifka family.

 

Basis of Presentation

 

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, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 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, 2014 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, 2015 are not necessarily indicative of the results of operations that will be realized for the entire year ending December 31, 2015.  The consolidated balance sheet at December 31, 2014 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, 2014.

 

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 and gasoline blendstocks 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 and gasoline blendstocks that the Partnership distributes.  Therefore, the Partnership’s volumes in gasoline and gasoline blendstocks 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.

 

Reclassification

 

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

 

Noncontrolling Interest

 

These financial statements reflect the application of ASC 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 statement 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 sales, logistics revenue and rental income as a percentage of the consolidated sales for the periods presented:

 

 

None of the Partnership’s customers accounted for greater than 10% of total sales for the three and nine months ended September 30, 2015.   The Partnership had one customer, ExxonMobil Corporation (“ExxonMobil”) that accounted for approximately 19% and 17% of total sales for the three and nine months ended September 30, 2014, respectively. 

 

Note 2.    Business Combinations

 

Acquisition of 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.

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including the final valuation and reconciliation of the assets purchased, including tangible and intangible assets, and liabilities assumed.

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

 

 

During the quarter ended September 30, 2015, the Partnership recorded certain changes to the preliminary purchase accounting, specifically related to the values assigned to intangible assets, environmental liabilities, long-term deferred taxes and working capital assets and liabilities.  The impact of these changes decreased goodwill from $195.0 million at June 30, 2015 to $193.3 million at September 30, 2015.

 

The following represents the change in goodwill from the period ended June 30, 2015 to September 30, 2015 (in thousands):

 

 

Management is in the process of completing its purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of Warren’s property and equipment, intangible assets consisting of supply contracts and favorable leasehold interests, and unfavorable leasehold interests.  This valuation is in the final stages of review by management, and at September 30, 2015, the estimated fair values of property and equipment of $253.1 million, intangibles assets of $38.4 million ($37.6 million of supply contracts and $0.8 million of favorable leasehold interests), and unfavorable leasehold interests of $2.5 million, which are included in other non-current liabilities, were developed by management based on their estimates, assumptions and acquisition history including reports from the third-party valuation firm.  The estimated fair values of the property and equipment, intangible assets and unfavorable leasehold interests will be supported by the valuations performed by the third-party valuation firm.

 

The fair value of $36.5 million assigned to the assumption of environmental liabilities was developed by management based on their estimates, assumptions and acquisition history, including reports from third-party environmental engineers (see Note 12).  The fair value of the environmental liabilities will be supported by the assessment performed by the third-party environmental engineers.

 

The long-term deferred tax liabilities of $74.8 million and short-term deferred tax assets of $1.4 million included in prepaid expenses and other current assets are primarily related to temporary differences associated with the fair value allocations of property and equipment and intangible assets, which are not deductible for tax purposes, net of acquired environmental liabilities and other deductible accrued liabilities.

 

The fair value of loan receivables purchased of $25.0 million was estimated by management based on the receivable’s payment terms,  assumptions of current interest rates and collectability and is included in prepaid expenses and other current assets and other non-current assets. The gross contractual amount for these loan receivables is $29.1 million, of which the Partnership estimates $2.4 million is not collectible. 

 

The fair values of the remaining Warren assets and liabilities noted above approximate their carrying values at January 7, 2015.  It is possible that once the Partnership receives the completed valuations on the property and equipment, intangible assets, unfavorable leasehold interests and the assumption of environmental liabilities, the final purchase price accounting may be different than what is presented above.

 

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon on its estimates and assumptions.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset.  These factors include, in part, a review of the expected use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset.  The Partnership amortizes these intangible assets over their estimated useful lives, which is consistent with the estimated undiscounted future cash flows of these assets.

 

As part of the purchase price allocation, identifiable intangible assets include supply contracts and favorable leasehold interests that are being amortized over seven to ten years and five years, respectively.  The weighted average life over which these acquired intangibles are being amortized is approximately ten and five years, respectively.  The supply contracts are subject to renewals, and assumptions related to the renewals have been included in the determination of the value of the supply contracts at the date of acquisition.  The Partnership determines the renewal assumptions used based on management’s assumptions of future events, including customer demand, customer attrition rates, contract renewal length and market overall conditions.  The supply contracts had a weighted average term of approximately five years prior to their next renewal.  As the purchase price accounting is preliminary, the final assumptions related to the likelihood of renewals remains in process.  Amortization expense related to the supply contracts amounted to $0.9 million and $2.8 million for the three and nine months ended September 30, 2015, respectively. 

 

The estimated remaining amortization expense for the supply contracts acquired in connection with the acquisition for each of the five succeeding years and thereafter is as follows (in thousands):

 

 

 

Amortization related to the favorable leasehold interests was immaterial for the three and nine months ended September 30, 2015.  The estimated remaining amortization for favorable leasehold interests acquired in connection with the acquisition for each of the five succeeding years is as follows (in thousands):

 

 

The $193.3 million of goodwill was assigned to the Gasoline Distribution and Station Operations (“GDSO”) reporting unit.  The goodwill recognized is attributable primarily to expected synergies and growth opportunities for the Partnership.  For federal income tax purposes, the acquisition of Warren was deemed to be a stock purchase and, therefore, any recorded goodwill is not expected to be tax deductible.  In accordance with the stock purchase agreement between the Partnership and Warren, the Partnership is ultimately not responsible for federal income tax obligations for the interim period, June 1, 2014 to January 6, 2015 (Warren’s fiscal year end was May 31).  Any tax obligations will be funded by the selling shareholders.  Any tax refund will be remitted to the selling shareholders.  Included in accounts receivable and accounts payable at September 30, 2015 is an estimated refund of $8.3 million to be paid to the selling shareholder of Warren.

 

In connection with the acquisition of Warren, the Partnership incurred acquisition costs totaling approximately $7.1 million, of which $0 and $5.4 million were recorded for the three and nine months ended September 30, 2015, respectively, and included in selling, general and administrative expenses in the accompanying consolidated statements of operations.  The remaining acquisition costs were incurred in 2014.  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.  This charge, which is principally for redundant and/or eliminated positions as a result of the acquisition, was not part of the purchase price allocation.  Approximately $0.8 million and  $1.3 million of the restructuring charge was paid during the three and nine months ended September 30, 2015, respectively, and the remaining balance of $1.0 million is expected to be paid in full by December 31, 2015.

 

The acquisition of Warren complements the Partnership’s existing retail presence in the Northeast and expands its footprint into the adjacent Mid-Atlantic region.  The Warren operations have been integrated into the Partnership’s GDSO reporting segment.

 

Acquisition of Revere Terminal

 

On January 14, 2015, through the Partnership’s wholly owned subsidiary, 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 next eight years.  The contingent consideration was estimated to be $0 as of the acquisition date and as of September 30, 2015 as the Partnership concluded that the treatment of the contingent consideration as a non-fair value measure is appropriate and that, as of September 30, 2015, the sale of the terminal for non-petroleum use within the next eight years is not probable.  The Partnership financed the transaction with available capacity 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.

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including the final valuation of the assets acquired, including tangible assets, and liabilities assumed.

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

 

During the quarter ended September 30, 2015, the Partnership recorded no changes to the preliminary purchase accounting.    

 

Management is in the process of completing its purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of the Revere Terminal’s property and equipment.  This valuation is in the final stages of review by management, and at September 30, 2015, the estimated fair value of property and equipment of $28.5 million was developed by management based on their estimates, assumptions and acquisition history including reports from the third-party valuation firm.  The estimated fair value of the property and equipment will be supported by valuations performed by the third-party valuation firm.  

 

The fair value of $3.1 million assigned to the assumption of environmental liabilities was estimated by management based on their estimates, assumptions and acquisition history, including preliminary reports from third-party environmental engineers (see Note 12).    

 

The Partnership is continuing its review of the estimated fair value of the assets acquired and liabilities assumed.  Accordingly, the purchase price allocation, including any value attributable to contingent consideration, will be finalized as the Partnership receives additional information relevant to the acquisition and the assets acquired and liabilities assumed. 

 

The fair values of the remaining Revere Terminal liabilities noted above approximate their carrying values at January 14, 2015. 

 

Acquisition of 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.

 

The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the allocation period in accordance with the FASB’s guidance regarding business combinations.  The purchase price allocation will be finalized as the Partnership receives additional information relevant to the acquisition, including the final valuation of the assets purchased, including tangible and intangible assets, and liabilities assumed.

 

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

 

During the quarter ended September 30, 2015, the Partnership recorded certain changes to the preliminary purchase accounting, specifically related to the values assigned to unfavorable leasehold interests, environmental liabilities and working capital assets and liabilities.  The impact of these changes increased goodwill from $94.3 million at June 30, 2015 to $94.8 million at September 30, 2015.

 

The following represents the change in goodwill from the period ended June 30, 2015 to September 30, 2015 (in thousands):

 

 

Management is in the process of completing its purchase price accounting.  The Partnership engaged a third-party valuation firm to assist in the valuation of Capitol’s property and equipment,  intangible assets consisting of supply contracts and favorable leasehold interests, and unfavorable leasehold interests.  This valuation is in the final stages of review by management, and during the quarter ended September 30, 2015, the estimated fair values of property and equipment of $149.6 million, including $60.0 million of owned property and equipment and $89.6 million of property and equipment for certain properties previously sold by Capitol within two sale-leaseback transactions that did not meet the criteria for sale accounting, and intangibles assets of $3.0 million ($2.2 million of favorable leasehold interests and $0.8 million of supply contracts) were developed by management based on their estimates, assumptions and acquisition history including reports from the third-party valuation firm.  The estimated fair value of unfavorable leasehold interests was $0.7 million at the date of acquisition.    The estimated fair values of the property and equipment, intangible assets and unfavorable leasehold interests will be supported by the valuations performed by the third-party valuation firm.  It is possible that once the Partnership receives the completed valuations on the property and equipment, intangible assets and unfavorable leasehold interests, the final purchase price accounting may be different than what is presented above.

 

The estimated fair value of property and equipment of $149.6 million includes $60.0 million of owned property and equipment and $89.6 million of certain properties previously sold by Capitol within two sale-leaseback transactions that did not meet the criteria for sale accounting.  As a result of not meeting the criteria for sale accounting, the property and equipment sold and leased back by Capitol has not been derecognized and, in purchase accounting, the estimated fair value of property and equipment associated with these sites of $89.6 million has been recognized within property and equipment.  Depreciation expense associated with these sale-leaseback properties amounted to $0.9 million and $1.2 million for the three and nine months ended September 30, 2015, respectively. 

 

The financing obligation of $89.6 million recognized is attributable to the two sale-leaseback transactions discussed above that did not meet the criteria for sale accounting and, as a result, were accounted for as financing arrangements.  These lease agreements mature on varying dates through 2029, and the fair value of $89.6 million assigned to the financing obligation was estimated by management based on the remaining payments attributable to the lease agreements over their terms and is equal to the estimated fair value of property and equipment associated with these sites.  Over the course of the lease agreements, the lease rental payments will be classified as interest expense on the financing obligation and the pay-down of the financing obligation as opposed to operating expense.  Interest expense associated with the financing obligation for these sale-leaseback properties amounted to $2.4 million and $3.2 million for the three and nine months ended September 30, 2015, respectively.  Lease rental payments associated with the financing obligation for these sale-leaseback properties amounted to $2.3 million and $3.1 million for the three and nine months ended September 30, 2015, respectively.  The financing obligation balance outstanding at September 30, 2015 was $89.7 million. The Partnership is in the process of completing its review of the valuation of the financing obligation recognized. 

 

The fair value of $0.3 million assigned to the assumption of environmental liabilities was developed by management based on their estimates, assumptions and acquisition history (see Note 12).    

 

The fair values of the remaining Capitol assets and liabilities noted above approximate their carrying values at June 1, 2015. 

 

The preliminary purchase price for the acquisition was allocated to assets acquired and liabilities assumed based on their estimated fair values.  The Partnership then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, based upon their estimates and assumptions.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired was allocated to goodwill.

 

The Partnership utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of an intangible asset.  These factors include, in part, a review of the expected use by the Partnership of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset.  The Partnership amortizes these intangible assets over their estimated useful lives which is consistent with the estimated undiscounted future cash flows of these assets.

 

As part of the purchase price allocation, identifiable intangible assets include supply contracts and favorable leasehold interests that are being amortized over seven and two years, respectively.  The weighted average life over which these acquired intangibles are being amortized is approximately seven and two years, respectively.  The supply contracts are subject to renewals, and assumptions related to the renewals have been included in the determination of the value of the supply contracts at the date of acquisition.  The Partnership determines the renewal assumptions used based on management’s assumptions of future events, including customer demand, customer attrition rates, contract renewal length and market overall conditions.  The supply contracts had a weighted average term of approximately one year prior to their next renewal.  As the purchase price accounting is preliminary, the final assumptions related to the likelihood of renewals remains in process.  Amortization expense related to the supply contracts was immaterial  for the three and nine months ended September 30, 2015.    

 

The estimated remaining amortization expense for the supply contracts acquired in connection with the acquisition for each of the five succeeding years and thereafter is as follows (in thousands):

 

 

Amortization of favorable leasehold interests was $0.3 million and $0.4 million for the three and nine months ended September 30, 2015, respectively.  The estimated remaining amortization for favorable leasehold interests acquired in connection with the acquisition for each of the three succeeding years is as follows (in thousands):

 

 

The $94.8 million of goodwill was assigned to the GDSO reporting unit.  The goodwill recognized is attributable primarily to the expansion of the Partnership’s presence in active markets in the East Coast in which the Partnership can leverage its existing operations and dealer relationships without significant incremental expense to grow the business.  The transaction also positions the Partnership to expand through tuck-in acquisitions as well as new-to-industry sites. 

The goodwill is expected to be tax deductible.  The operations of Capitol have been integrated into the Partnership’s GDSO reporting segment.

 

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 included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

 

Goodwill

 

The following table presents the changes in goodwill (in thousands):

 

 

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 statement of operations for the nine months ended September 30, 2015.  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.

 

The following unaudited pro forma information for 2015 presents the consolidated results of operations of the Partnership as if the acquisition of Capitol occurred at the beginning of the periods presented, with pro forma adjustments to give effect to certain adjustments.  The following unaudited pro forma information for 2014 presents the consolidated results of operations of the Partnership as if the acquisitions of Warren and Capitol occurred at the beginning of the periods presented, with pro forma adjustments to give effect to intercompany sales and certain other adjustments (in thousands, except per unit data):

 

 

 

Pro forma information for Warren for the three and nine months ended September 30, 2014 is based on unaudited revenues and net income.  Pro forma information for Capitol for the three and nine months ended September 30, 2014 is estimated based on annual revenues and net income.  Warren’s revenues and net income included in the Partnership’s consolidated operating results from January 7, 2015, the acquisition date, through the period ended September 30, 2015 were $0.9 billion and $14.3 million, respectively.  Capitol’s revenues and net income included in the Partnership’s

consolidated operating results from June 1, 2015, the acquisition date, through the period ended September 30, 2015 were $0.1 billion and $2.0 million, respectively.

 

 

 

 

Note 3.    Net 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 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, 2015 and December 31, 2014 excluded 498,985 and 390,602 common units, respectively, held on behalf of the Partnership pursuant to its repurchase program (see Note 13).  These units are not deemed outstanding for purposes of calculating net income per limited partner unit (basic and diluted).

 

The following table provides a reconciliation of net income and the assumed allocation of net income to the limited partners’ interest for purposes of computing net income per limited partner unit for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per unit data):

 

 

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