Westlake Chemical Partners LP — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; the filing is an annual report, not a standalone Q4 filing. The Partnership’s sole revenue-generating asset is its 22.8% limited partner interest in Westlake Chemical OpCo LP (OpCo), which it controls through OpCo’s general partner. OpCo owns three ethylene plants with approximately 3.72 billion pounds of annual capacity and a 200-mile pipeline. Westlake owns the remaining 77.2% of OpCo.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $966.7 million | $1,091.9 million | Down 11.5% |
| Gross profit / margin | $378.9 million / 39.2% | $379.4 million / 34.7% | Profit nearly flat; margin increased |
| Operating income | $353.0 million | $350.2 million | Up $2.8 million |
| Net income, consolidated | $341.1 million | $332.9 million | Up $8.2 million |
| Net income attributable to the Partnership | $66.2 million | $61.0 million | Up $5.2 million |
| Basic and diluted earnings per common unit | $1.88 | $1.77 | Up $0.11 |
| Operating cash flow | $373.4 million | $450.8 million | Down $77.4 million |
| Capital expenditures | $37.0 million | $43.7 million | Down $6.7 million |
| MLP distributable cash flow | $72.0 million | $73.2 million | Down $1.2 million |
EBITDA, a non-GAAP measure, was $456.9 million versus $460.6 million. The Partnership reported $17.2 million of cash and cash equivalents and $223.6 million of working capital at year-end. It also held $123.2 million invested with Westlake under an agreement providing daily availability. Total debt was $399.7 million, all payable to Westlake affiliates, at a weighted-average interest rate of 2.23%; the facilities mature in 2023. The Partnership reported compliance with debt covenants. A 100-basis-point increase in variable rates would add an estimated $4.0 million to annual interest expense.
Material changes and unusual items
- Sales volume fell 18.6%, primarily because Hurricanes Laura and Delta shut down the Lake Charles Petro 1 and Petro 2 units for a significant period in August through October. Lower third-party sales also contributed to the revenue decline.
- Under the take-or-pay sales agreement, the Partnership recognized a $69.6 million buyer deficiency fee for the hurricane-related force majeure events; Westlake paid it in January 2021. The fee, higher contract pricing to Westlake, and lower interest expense helped lift earnings despite lower volumes and increased maintenance expense.
- Operating cash flow declined mainly because working capital used $67.9 million in 2020, compared with providing $11.7 million in 2019. The year-end Westlake receivable increased to $108.0 million from $42.8 million.
- Partnership distributions declared were $1.8856 per unit for 2020, compared with $1.8005 in 2019. The board declared a $0.4714-per-unit Q4 2020 distribution, paid in February 2021. Distributions are discretionary and are not contractually guaranteed.
Outlook, risks, and contingencies
- No quantified earnings guidance is provided. Management said COVID-19 did not cause significant operational disruption in 2020, largely because Westlake is committed to purchase 95% of planned production under the cost-plus agreement. The filing notes weak market prices and operating rates, and says production may be curtailed when third-party sales are uneconomic.
- The Petro 2 turnaround was deferred to the second half of 2021 and expected to last about 60 days. Extreme winter weather in February 2021 disrupted facilities in Louisiana and Kentucky; OpCo declared force majeure and expected to recognize a buyer deficiency fee in 2021. The filing does not provide a clear amount.
- Revenue and distributions are highly dependent on Westlake: Westlake accounted for 91.9% of 2020 net sales. The sales, feedstock, services, financing, and cash-investment arrangements are related-party agreements. The ethylene sales and feedstock agreements have initial terms through December 31, 2026; renewal or replacement terms are not assured.
- Environmental compliance capital expenditures were $4.5 million in 2020; estimates are $2.8 million in 2021 and $12.8 million in 2022. The higher 2022 estimate includes approximately $11.4 million for EPA-required flare corrective actions, for which Westlake is expected to indemnify OpCo. The filing says resolution of the flare matter may involve a monetary sanction exceeding $300,000.
- Westlake controls the general partner and holds 40.1% of the Partnership’s common units and its incentive distribution rights. Unitholders have limited governance rights; affiliate reimbursements are not capped. The filing reports approximately $146.7 million paid for affiliate-related expenses in 2020.
- The auditor identified revenue from the Ethylene Sales Agreement, including calculation of the hurricane deficiency fee, as a critical audit matter. PwC gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Investor verification priorities
- Confirm the collection and accounting of the $69.6 million hurricane fee, and the expected 2021 fee and costs associated with the February weather disruptions.
- Assess the timing and cost of the deferred Petro 2 turnaround and the effect of outages on production, cash flow, and distributions.
- Review the $399.7 million of variable-rate affiliate debt, covenant headroom, and refinancing needs in 2023, alongside working-capital and Westlake receivable exposure.
- Evaluate the sustainability of distributions against $72.0 million of MLP distributable cash flow and the board’s discretion to change or suspend distributions.
- Review related-party pricing, service reimbursements, environmental indemnification, and the prospects for renewing key Westlake agreements after 2026.