Westlake Chemical Partners LP — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; figures are unaudited. The Partnership’s primary asset is a 13.3% limited-partner interest in Westlake Chemical OpCo LP, which it controls and consolidates. OpCo operates three natural-gas-liquids processing facilities and an ethylene pipeline. Westlake owns the remaining 86.7% of OpCo and is the principal customer, supplier, lender, and service provider.
Financial performance and position
Amounts below are in millions of dollars except per-unit data.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $252.6 | $258.4 |
| Gross profit / margin | $110.4 / 43.7% | $96.2 / 37.2% |
| Operating income | $104.3 | $90.2 |
| Consolidated net income | $102.8 | $88.4 |
| Net income attributable to Partnership | $12.1 | $8.5 |
| Partnership net income per unit | $0.45 | $0.31 |
| Operating cash flow | $112.6 | $113.2 |
| Capital expenditures | $79.1 | $39.5 |
EBITDA, a non-GAAP measure, was $124.8 million versus $110.0 million; MLP distributable cash flow was $9.5 million versus $9.0 million. Cash and cash equivalents were $178.7 million at March 31, 2016, compared with $169.6 million at year-end 2015. Total debt payable to Westlake was $443.5 million, up from $384.0 million; all debt was variable-rate. Current assets were $243.5 million and current liabilities $73.3 million. The weighted-average debt rate was 3.41% at quarter-end. The Partnership reported compliance with debt covenants.
Material changes versus prior year
- Sales declined $5.8 million (2.2%). Average sales price fell 3.0%, partly offset by 0.8% higher sales volume. Westlake sales rose to $231.3 million from $208.9 million, while third-party co-product, ethylene, and feedstock sales fell to $21.3 million from $49.5 million; there were no third-party ethylene sales in Q1 2016.
- Management attributed higher gross profit mainly to increased production and sales to Westlake and recognition of a production-cost shortfall under the sales agreement, partly offset by the absence of third-party ethylene sales. Ethylene production increased approximately 3% year over year.
- Operating cash flow was broadly flat, while investing cash outflow approximately doubled, principally due to Petro 1 expansion spending. Borrowings from Westlake increased to fund projects; financing outflow was lower year over year partly because distributions to Westlake were lower.
Outlook, risks, and unusual items
- Management estimated 2016 total capital expenditures, including expansion, maintenance, and turnaround spending, at approximately $293 million. The Petro 1 upgrade and expansion was estimated at $285–$345 million, expected to add approximately 250 million pounds of annual ethylene capacity, and began in April 2016. The Calvert City project was estimated at $70–$80 million, adding approximately 70 million pounds annually, with completion targeted for the first half of 2017. These projects were expected to be funded with OpCo Revolver borrowings. Westlake was not obligated to provide future loans.
- The general partner declared a Q1 distribution of $0.3168 per unit, payable May 24, 2016; the filing states distributions are not contractually assured. The Ethylene Sales Agreement provides cost-plus pricing and minimum purchase commitments, but the Partnership remains exposed to third-party commodity sales and operating performance.
- Westlake represented 91.6% of Q1 sales. This related-party concentration, together with Westlake’s ownership of the general partner, majority of units, and incentive distribution rights, is a key dependency.
- Environmental matters include potential CERCLA obligations at Calvert City and EPA discussions concerning flare compliance, which could require additional controls and increase costs. Louisiana regulators and Westlake reached a verbal agreement on settlements totaling $192,000 in civil penalties; the filing does not state a final settlement had been executed. Westlake agreed to indemnify the Partnership for certain pre-August 4, 2014 liabilities.
- A cash-flow hedge had a $312,000 liability at quarter-end and contributed a $0.7 million other comprehensive loss. Management estimated a 100-basis-point increase in applicable variable rates would increase annual interest expense by approximately $3.7 million.
Important facts for investors to verify
- Whether the Petro 1 and Calvert City projects meet stated budgets, schedules, and capacity targets, and how much additional borrowing they require.
- Whether higher production and shortfall recoveries continue to support margins, particularly with no third-party ethylene sales in Q1.
- Westlake’s continuing ability and willingness to fund OpCo, and any restrictions on OpCo distributions under Westlake’s debt agreements.
- Current status and potential costs of the Calvert City environmental matters, EPA flare discussions, and Louisiana settlements.
- Future distribution coverage and the effect of variable-rate debt, related-party dependence, and any additional OpCo interest purchases on liquidity and leverage.