Westlake Chemical Partners LP — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The partnership operates and controls Westlake Chemical OpCo LP, which owns three ethylene production facilities and a pipeline. Westlake owns 77.2% of OpCo; the partnership owns 22.8% and consolidates OpCo.
Financial performance
Amounts in millions, except per-unit data and margins.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $232.0 | $249.9 | $721.0 | $819.1 |
| Gross profit | $100.4 | $93.2 | $294.0 | $275.8 |
| Gross margin | 43.3% | 37.3% | 40.8% | 33.7% |
| Income from operations | $94.1 | $86.4 | $275.4 | $254.4 |
| Consolidated net income | $91.8 | $82.5 | $266.0 | $241.0 |
| Net income attributable to partnership | $18.5 | $14.9 | $51.1 | $43.6 |
| Net income per common unit | $0.53 | $0.42 | $1.45 | $1.27 |
| MLP distributable cash flow | $21.2 | $20.5 | $56.4 | $54.4 |
| EBITDA | $120.1 | $113.6 | $353.9 | $337.3 |
For the first nine months, operating cash flow was $340.9 million versus $335.2 million. Investing activities used $58.2 million, including $29.2 million of capital expenditures; financing activities used $279.3 million, primarily distributions. Cash was $23.3 million at quarter-end. A further $191.2 million was invested with Westlake under the Investment Management Agreement and was stated to be available daily for liquidity needs.
Long-term debt payable to Westlake was $399.7 million, all variable-rate, with a 2.3% weighted-average rate. The partnership reported compliance with debt covenants. Current assets were $278.2 million and current liabilities $41.7 million. The quarterly distribution declared after quarter-end was $0.4714 per unit, payable November 24, 2020.
Changes and material drivers
- Q3 sales fell 7.2% year over year; nine-month sales declined 12.0%. Management attributed the decreases chiefly to lower production and reduced third-party sales. Sales volumes declined 34.5% in Q3 and 15.2% for the nine-month period.
- Despite lower revenue, gross profit and partnership-attributable earnings rose. Lower interest expense and SG&A also helped. Interest expense was $2.3 million in Q3 and $9.7 million for nine months, down from $4.4 million and $15.4 million, respectively.
- Hurricane Laura-related outages at Lake Charles Petro 1 and Petro 2 led to a $41.3 million buyer deficiency fee recognized in Q3 revenue under the take-or-pay Ethylene Sales Agreement. Collection was scheduled after year-end. The fee materially supported reported earnings and margins.
- Lower interest rates reduced interest expense; the debt balance was unchanged from December 2019. The nine-month cash-flow increase was partly offset by working-capital use, including increased Westlake receivables associated with the deficiency fee.
Outlook, risks and contingencies
- Management reported no significant COVID-19 operating disruption through September and did not expect significant disruption, but said the pandemic’s future financial and operating effects remained uncertain. Weak ethylene and co-product prices, added industry capacity and lower operating rates may persist; the partnership may idle production if third-party sales are uneconomic.
- Petro 1 and Petro 2 were shut down during September following Hurricane Laura and related start-up issues; both had resumed production by the filing. Hurricane Delta also prompted precautionary shutdowns. A Petro 2 turnaround was deferred to the second half of 2021 and was expected to last about 60 days.
- Approximately 93.9% of Q3 sales and 91.5% of nine-month sales were to Westlake. Distributions therefore depend substantially on Westlake’s ability to meet contractual obligations; Westlake has not pledged assets to secure them. The partnership said it had no legal or contractual obligation to pay a minimum quarterly distribution.
- Debt is variable-rate and owed to Westlake affiliates. Management estimated that a 100-basis-point rate increase would add about $4.0 million to annual interest expense. LIBOR phase-out provisions were added to the MLP Revolver; management did not expect the transition’s impact to be material.
- The filing describes EPA scrutiny of flare emissions at Calvert City and Lake Charles and a possible consent decree and corrective actions. The partnership said resolution may require a monetary sanction exceeding $100,000. Westlake indemnifies the partnership for certain pre-August 2014 liabilities; other disclosed legal proceedings were not expected by management to materially affect results.
Important facts for investors to verify
- Whether and when the $41.3 million buyer deficiency fee was collected, and whether future force majeure events affect minimum-payment protections or production.
- Post-quarter operating performance and the status, cost and timing of the Petro 2 turnaround.
- Westlake’s creditworthiness and ability to satisfy the Ethylene Sales Agreement, given the high customer concentration and related-party financing and cash management.
- Distribution coverage and liquidity after turnaround reserves, capital spending and payments to Westlake; distributable cash flow is a non-GAAP measure and excludes working-capital changes.
- Developments in the EPA flare matter, potential sanctions and any associated environmental or capital costs.