Westlake Chemical Partners LP — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited. The Partnership consolidates OpCo, which owns three ethylene facilities and a pipeline; the Partnership holds a 13.3% limited-partner interest in OpCo, while Westlake owns the remaining 86.7%.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $277.4 million | $252.6 million |
| Gross profit / margin | $98.0 million / 35.3% | $110.4 million / 43.7% |
| Operating income | $90.1 million | $104.3 million |
| Consolidated net income | $86.0 million | $102.8 million |
| Net income attributable to the Partnership | $9.8 million | $12.1 million |
| Partnership net income per unit | $0.35 | $0.45 |
| Cash from operating activities | $149.1 million | $112.6 million |
| MLP distributable cash flow | $11.4 million | $9.5 million |
| EBITDA | $121.9 million | $124.8 million |
- Revenue increased 9.8%, with average product sales prices up 9.3% and volumes up 0.5%. Third-party co-product, ethylene and other sales rose to $64.5 million from $21.3 million; sales to Westlake declined to $212.9 million from $231.3 million.
- Westlake represented 76.7% of net sales, down from 91.6% a year earlier.
- Profitability fell despite higher sales: Q1 2016 included an approximately $11.8 million production-cost shortfall recovery recognized as revenue. Q1 2017 also had higher depreciation and amortization and SG&A. Gross margin declined 8.4 percentage points.
- Operating cash flow improved largely on working capital: working-capital components provided $43.2 million in Q1 2017 versus using $7.1 million in Q1 2016. Cash increased $34.1 million to $123.0 million.
- Investing cash outflow was $21.5 million, versus $79.0 million, largely reflecting lower capital spending after the Lake Charles expansion. Financing cash outflow was $93.5 million, including $89.6 million distributed to Westlake and $9.5 million to other unitholders.
Balance sheet, debt and distributions
- At March 31, 2017, cash was $123.0 million, total assets $1.557 billion, and total liabilities $648.8 million.
- Debt payable to Westlake totaled $600.2 million: $31.8 million under the 2013 notes, $433.1 million under the OpCo Revolver, and $135.3 million under the MLP Revolver. All debt is variable-rate; the weighted-average rate was 3.86%. The Partnership reported covenant compliance.
- The OpCo Revolver is scheduled to mature in 2019; the $300 million MLP Revolver is scheduled to mature April 29, 2018. The Partnership said it was evaluating refinancing alternatives for the MLP Revolver.
- Management said cash, operating cash generation and revolving facilities should meet working-capital, capital-spending and distribution needs; Westlake is not obligated to provide additional financing. The Partnership had no off-balance-sheet arrangements.
- On May 1, 2017, the general partner declared a $0.3549-per-unit distribution for Q1, plus $231,000 to IDR holders, payable May 30. Management emphasized distributions are not legally or contractually guaranteed.
Outlook, developments and risks
- The Calvert City upgrade and expansion was completed in April 2017. Together with other initiatives, it is expected to add about 100 million pounds of annual ethylene capacity, bringing the facility to approximately 730 million pounds.
- 2017 capital expenditures were expected to total approximately $71.2 million; $23.2 million had been spent in Q1. Westlake was expected to lend additional funds for expansion spending, but had no obligation to do so.
- The Partnership says its cost-plus Westlake sales agreement and minimum purchase commitment substantially mitigate commodity-price exposure; direct exposure is concentrated in approximately 5% of production sold to third parties. The agreement’s pricing and cost recovery, Westlake’s purchases, operating performance and customer creditworthiness remain important dependencies.
- All debt is variable-rate, although an interest-rate contract fixes LIBOR on part of the MLP Revolver. A 100-basis-point increase in the applicable variable rate was estimated to raise annual interest expense by approximately $5.3 million.
- Environmental matters include an EPA flare-compliance initiative that could require corrective actions and a monetary sanction exceeding $100,000, according to the filing. Louisiana violations were settled for combined civil penalties of $192,000. Westlake indemnifies certain pre-August 4, 2014 liabilities; management did not expect the described legal proceedings to have a material adverse effect.
- Other disclosed risks include feedstock and energy costs, commodity markets, unplanned outages, environmental regulation, capital-market access and refinancing. No formal earnings guidance was provided.
Investor facts to verify
- Whether the Calvert City capacity increase was achieved as expected and how it affected production, sales and margins.
- Whether 2017 capital spending and expansion funding remain on plan, including the extent of any further Westlake loans.
- Progress and terms of refinancing the MLP Revolver ahead of its April 2018 maturity, and the Partnership’s interest-rate exposure.
- Whether cash generation supports distributions after turnaround reserves and maintenance capital expenditures, noting distributions are discretionary.
- Updates on EPA flare matters, environmental compliance and any related costs or liabilities.