Westlake Chemical Partners LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Westlake Chemical Partners LP operates through Westlake Chemical OpCo LP, which owns ethylene facilities and a pipeline. The Partnership owns 22.8% of OpCo and controls it through its general partner; Westlake owns the remaining 77.2%. The statements consolidate OpCo, including Westlake’s noncontrolling interest.
Financial performance and liquidity
- Revenue: Net sales were $250.5 million, down 16.2% from $299.1 million in Q1 2019. Lower average sales prices reduced sales by 19.5%, partly offset by a 3.3% increase in volume.
- Profit and margins: Gross profit rose to $103.5 million from $90.7 million; gross margin increased to 41.3% from 30.3%. Operating income was $97.4 million versus $83.7 million. Consolidated net income was $93.8 million versus $78.4 million; net income attributable to the Partnership was $17.7 million versus $15.0 million. Earnings per common unit were $0.50 versus $0.46.
- Cash flow: Operating cash flow was $111.0 million, compared with $113.5 million. Capital expenditures were $12.0 million. Cash and cash equivalents ended the quarter at $24.1 million, up from $19.9 million at year-end.
- Supplemental measures: MLP distributable cash flow, a non-GAAP measure, was $18.3 million versus $17.6 million; EBITDA, also non-GAAP, was $124.0 million versus $111.3 million.
- Debt and liquidity: Debt payable to Westlake was $399.7 million, unchanged from year-end, with a 3.9% weighted-average interest rate. The Partnership also held $161.8 million invested with Westlake under an agreement providing daily availability of funds. It reported compliance with debt covenants. The MLP Revolver maturity was extended to March 19, 2023, with a LIBOR phase-out provision.
- Distribution: A quarterly cash distribution of $0.4714 per unit was declared after quarter-end, payable May 26, 2020. The filing states distributions are not contractually guaranteed.
Material changes versus Q1 2019
- Sales fell by $48.5 million, primarily because lower ethylene prices to Westlake under the cost-based sales agreement more than offset increased volumes.
- Profitability improved despite lower revenue, driven by higher volumes, improved margins on third-party ethylene sales as feedstock costs declined, lower SG&A, and lower interest expense. Interest expense fell to $4.0 million from $5.9 million, mainly reflecting lower average debt after a 2019 repayment.
- Investing cash outflow narrowed to $11.0 million from $139.6 million, largely because of lower net investment activity under the Investment Management Agreement. Financing shifted to a $95.8 million outflow from a $91.0 million inflow in Q1 2019, when the Partnership raised equity and borrowed to fund an OpCo interest purchase.
Outlook, risks, and contingencies
- Management reported no significant operational disruption in Q1 and expected the 95% take-or-pay minimum purchase commitment from Westlake to provide support. However, the filing warns that COVID-19 could materially affect Westlake, the Partnership, customers, suppliers, operations, liquidity, and access to capital.
- Management cited weak ethylene and co-product prices following the sharp crude-oil decline and recent capacity additions. Production could be idled or operating rates reduced if third-party sales are uneconomic. No quantified earnings or cash-flow guidance is provided.
- The planned Petro 2 turnaround was expected to be deferred to the first half of 2021 and last about 60 days. Management also described cost reduction, efficiency, and lower capital-spending efforts.
- Westlake generated approximately 85.7% of Q1 net sales. The Partnership’s distributions depend substantially on Westlake meeting its contractual obligations; Westlake has not pledged assets to secure those obligations.
- All $399.7 million of debt was variable-rate debt owed to Westlake affiliates. A 100-basis-point rate increase would raise annual interest expense by approximately $4.0 million, based on quarter-end debt. Management did not expect LIBOR replacement to have a material effect.
- The filing describes an EPA flare-enforcement matter involving Westlake facilities; the Partnership states its resolution may require a monetary sanction in excess of $100,000. It also reports environmental and other legal proceedings, which management does not believe will materially affect financial condition, results, or cash flows. Westlake indemnifies certain pre-August 2014 liabilities.
Key facts for investors to verify
- Westlake’s ability to meet the Ethylene Sales Agreement minimum purchase and payment obligations, given the revenue concentration and COVID-19 risks.
- Whether weak commodity prices, potential operating-rate reductions, and the deferred Petro 2 turnaround affect future margins, cash generation, or distributions.
- Availability and terms of the $161.8 million invested with Westlake, and the Partnership’s exposure to its affiliate lender and variable-rate debt.
- Progress and potential financial consequences of the EPA flare matter and other environmental contingencies.
- Whether distributable cash flow supports the declared distribution; the filing’s non-GAAP measure excludes working-capital changes and is not equivalent to operating cash flow.