Westlake Chemical Partners LP — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Business context
The Partnership owns a 13.3% limited partner interest in Westlake Chemical OpCo LP and controls OpCo through its general partner; Westlake owns the remaining 86.7%. OpCo operates natural gas liquids processing facilities and an ethylene pipeline. The Partnership consolidates OpCo, with Westlake’s interest reflected as noncontrolling interest. Sales are largely governed by a long-term, cost-plus ethylene agreement with Westlake. Westlake accounted for 84.6% of Q3 sales and 87.6% of nine-month sales.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $229.4 | $248.6 | $692.8 | $758.7 |
| Gross profit / margin | $86.8 / 37.8% | $94.1 / 37.9% | $285.6 / 41.2% | $284.9 / 37.6% |
| Income from operations | $81.0 | $88.3 | $267.9 | $267.1 |
| Consolidated net income | $75.9 | $87.0 | $259.8 | $262.7 |
| Net income attributable to Partnership | $8.7 | $10.1 | $30.1 | $29.0 |
| Partnership net income per unit | $0.32 | $0.37 | $1.11 | $1.07 |
| MLP distributable cash flow | $6.8 | $9.5 | $20.6 | $27.7 |
Q3 sales fell 7.7% year over year; nine-month sales declined 8.7%. Partnership-attributable income fell 14.3% in Q3 but increased 3.6% for the nine-month period. Q3 gross margin was nearly unchanged, while the nine-month margin improved. The filing attributes much of the margin support to recoveries under the Ethylene Sales Agreement (“Shortfall”): $25.2 million in Q3 and $81.7 million year to date, principally related to higher maintenance costs.
Net cash provided by operating activities was $177.4 million for the first nine months, versus $331.2 million in 2015. Q3 operating cash flow was negative $7.9 million. Nine-month investing cash outflow was $268.5 million, including $268.6 million of property, plant and equipment additions. Cash was $75.0 million at September 30, down from $169.6 million at year-end 2015.
Long-term debt payable to Westlake was $595.1 million, up from $384.0 million at year-end; all debt was variable-rate, with a weighted-average rate of 3.49%. The Partnership reported compliance with debt covenants. Current assets were $192.3 million and current liabilities $47.6 million. A 100-basis-point increase in applicable variable rates was estimated to add about $5.2 million to annual interest expense. The Q3 distribution declared after quarter-end was $0.3353 per unit, plus $91,000 to IDR holders; the Partnership states distributions are not contractually guaranteed.
Material changes, outlook and risks
- Lower production and sales volumes drove the revenue decline. The Lake Charles Petro 1 turnaround and expansion, completed in July, increased annual ethylene capacity by about 250 million pounds. Calvert City experienced a mechanical-failure outage lasting 46 days, restarting in mid-July; the force majeure reduced Westlake’s minimum-purchase obligation for the period beyond 45 days.
- A Calvert City expansion is planned to add about 70 million pounds of annual capacity, targeted for completion in the first half of 2017. Estimated cost is $70–$80 million, funded through the OpCo Revolver; approximately $30.5 million had been incurred by September 30. Expected total 2016 capital expenditures were about $293 million.
- Management said available cash, operating cash flow and Westlake revolvers were expected to meet working-capital, capital-spending and distribution needs. Westlake is not obligated to provide additional financing. The filing gives project expectations but no formal earnings guidance.
- Key exposures include reliance on Westlake as the dominant customer and related-party counterparty, variable-rate debt, operating interruptions, commodity-market conditions on third-party sales, and environmental regulation. The EPA was pursuing corrective actions concerning flares and a monetary sanction in excess of $100,000; a Louisiana regulator had verbally agreed to settlements totaling $192,000 in civil penalties. Westlake indemnifies the Partnership for certain pre-IPO liabilities.
- In August 2016, OpCo and certain Westlake subsidiaries were released from guarantees under Westlake’s credit facility and senior-note indentures. The Partnership reported no material change in its risk factors and no material adverse effect expected from other legal proceedings.
Important facts for investors to verify
- Whether Shortfall recoveries are sufficient and recurring, and how the related contract terms affect future revenue and margins.
- Production, sales volumes and operating performance after the Petro 1 expansion and Calvert City outage; progress, cost and financing of the Calvert City project.
- Cash conversion and working-capital movements, given the sharp year-over-year decline in nine-month operating cash flow and the Q3 cash outflow.
- Debt availability, covenant headroom, interest-rate exposure and continued access to Westlake financing.
- Westlake’s creditworthiness and the implications of the customer concentration and related-party arrangements for distributions and liquidity.
- Developments in the EPA flare matter and Louisiana environmental settlements, including final costs and any required capital or operating changes.