Westlake Chemical Partners LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The Partnership operates and controls Westlake Chemical OpCo LP (OpCo), which owns three ethylene production facilities and an ethylene pipeline. The Partnership increased its OpCo limited partner interest from 18.3% to 22.8%, effective January 1, 2019; Westlake retained 77.2%. Reported consolidated results include OpCo, with Westlake’s share presented as noncontrolling interest.
Financial performance and liquidity
- Revenue: Net sales were $299.1 million, up 5.2% from $284.3 million. Sales to Westlake were $257.0 million; third-party co-product, ethylene and other sales were $42.0 million.
- Profit and margins: Gross profit was $90.7 million versus $92.5 million; gross margin declined to 30.3% from 32.5%. Operating income was $83.7 million versus $85.4 million. Consolidated net income was $78.4 million versus $80.7 million, while net income attributable to the Partnership rose to $15.0 million from $12.3 million. Earnings per common unit were $0.46 versus $0.36.
- Other measures: EBITDA, a non-GAAP measure, was $111.3 million versus $113.6 million. MLP distributable cash flow, also non-GAAP, was $17.6 million versus $14.5 million.
- Cash flow: Operating activities provided $113.5 million versus $106.2 million. Investing activities used $139.6 million, principally reflecting net investments with Westlake under the Investment Management Agreement and capital spending. Financing activities provided $91.0 million. Cash at quarter-end was $84.6 million.
- Debt and liquidity: Debt payable to Westlake was $601.1 million, all variable-rate, compared with $477.6 million at year-end. The weighted-average rate was 4.8%. The Partnership also had $276.5 million receivable under its Westlake investment agreement, whose terms provide daily availability of invested cash. Management said available liquidity was expected to cover needs and distributions. In April 2019, the Partnership repaid $201.4 million under the OpCo Revolver.
- Distribution: A $0.4452-per-unit quarterly distribution was declared after quarter-end, payable May 28, 2019. The filing states the Partnership has no legal or contractual obligation to maintain a particular distribution.
Material changes and management commentary
- On March 29, the Partnership issued 2,940,818 common units at $21.40 per unit, raising approximately $62.9 million, and used the proceeds together with MLP Revolver borrowings to acquire the additional 4.5% OpCo interest for approximately $201.4 million.
- Total sales rose mainly because of higher ethylene sales prices to Westlake under the cost-based sales agreement and greater third-party volumes. Overall average sales price increased 4.6%; sales volume increased 0.6%.
- Lower third-party ethylene margins—reflecting lower sales prices and higher feedstock costs—reduced gross profit, operating income, consolidated net income and EBITDA. Higher Partnership-attributable income and distributable cash flow primarily reflected the increased OpCo ownership and, for distributable cash flow, the elimination of IDR distributions.
- Capital expenditures were $12.1 million, versus $9.7 million in Q1 2018. The Partnership reported covenant compliance at March 31 and no off-balance-sheet arrangements.
Outlook, risks and contingencies
- No specific earnings or operating guidance was provided. Management’s liquidity outlook relies on operating cash flow, revolving facilities and potential equity or debt issuance; Westlake may provide financing but is not obligated to do so.
- Westlake accounted for approximately 85.9% of Q1 sales, up from 82.7% a year earlier. This customer concentration and the related-party sales, financing and cash-investment arrangements are important dependencies.
- Commodity risk is concentrated in approximately 5% of ethylene production sold to third parties; the filing says the minimum-purchase and cost-plus agreement substantially mitigates other commodity exposure. All debt is variable-rate: a hypothetical 100-basis-point increase would add approximately $6.0 million to annual interest expense, based on quarter-end debt.
- Environmental matters include an EPA flare investigation, for which the Partnership said resolution may require a monetary sanction exceeding $100,000; the filing does not clearly state the unit basis for that figure. Separately, Westlake and the EPA had an agreement in principle for a $49,000 penalty and a $184,000 supplemental environmental project; settlement documents were being finalized. Westlake indemnifies the Partnership for certain pre-August 4, 2014 liabilities. The Partnership said other legal proceedings were not expected to have a material adverse effect.
- Other disclosed risks include feedstock and energy cost volatility, industry cyclicality, operational interruptions, environmental regulation, access to capital and customer creditworthiness. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the additional OpCo ownership generates the expected cash distributions, and the effect of its financing on leverage and interest expense.
- The amount, availability and counterparty exposure associated with the $276.5 million invested with Westlake, alongside the Partnership’s related-party debt and revenue concentration.
- Whether third-party ethylene margins recover and whether operating cash flow can support maintenance, turnarounds and the distribution.
- Updates on the EPA flare matter, the Risk Management Program settlement and any related costs or indemnification.
- Current debt balances and facility headroom after the April repayment; the filing provides quarter-end balances, not post-repayment balances.