Westlake Chemical Partners LP — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The partnership was formed by Westlake Chemical Corporation and completed its IPO in August 2014. It consolidates OpCo, although it owned only a 13.3% limited partner interest at June 30; Westlake owned the remaining 86.7%. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
- Q2 revenue: $251.7, down 52.0% from $524.1 in the 2014 predecessor period. Gross profit was $94.5 and operating income $88.5. Consolidated net income was $87.2, including $76.8 attributable to OpCo’s noncontrolling interest; net income attributable to the partnership was $10.4, or $0.39 per limited partner unit.
- First-half revenue: $510.1, down 52.9% from $1,084.1. Gross profit was $190.8, operating income $178.8, and consolidated net income $175.6. Net income attributable to the partnership was $18.9, or $0.70 per unit.
- Margins: Gross margin was 37.5% in Q2 versus 47.0% in the prior-year period; first-half gross margin was 37.4% versus 44.2%. EBITDA, a non-GAAP measure, was $109.0 in Q2 and $219.0 for the first half, compared with $262.0 and $506.8, respectively, in the predecessor periods.
- Cash flow and investment: First-half operating cash flow was $229.9, compared with $378.9 in 2014. Capital expenditures were $95.5, versus $106.2. MLP distributable cash flow, a non-GAAP measure, was $9.2 for Q2 and $18.2 for the first half.
- Liquidity and debt: Cash and cash equivalents were $137.3 at June 30. Debt payable to Westlake totaled $281.0: $31.8 under promissory notes, $113.9 under the $600 million OpCo revolver, and $135.3 under the $300 million MLP revolver. The partnership reported compliance with debt covenants.
- Distributions: A Q2 distribution of $0.2910 per unit, totaling $7.9, was declared for payment in August 2015. The filing cautions that distributions are not contractually assured.
Material changes and comparability
The year-over-year revenue and profit declines are not directly comparable with the predecessor periods, which predate the IPO. The post-IPO Ethylene Sales Agreement replaced historical transfer pricing for most Westlake sales with cost-plus pricing designed to provide a fixed margin of $0.10 per pound. The filing attributes lower revenue chiefly to this pricing arrangement and sharply lower ethylene and co-product prices; lower feedstock costs and increased Calvert City production partly offset the pressure. Average sales prices fell 45.6% in Q2 and 44.1% in the first half; sales volumes fell 6.4% and 8.8%, respectively.
On April 29, 2015, the partnership bought an additional 2.7% interest in OpCo for approximately $135.3 million, bringing its interest to 13.3%; the purchase was funded through the MLP revolver. The partnership’s federal income-tax treatment also differs from the predecessor’s: it is generally treated as a partnership rather than paying federal income tax at the entity level.
Outlook, risks, and contingencies
- The Ethylene Sales Agreement provides for Westlake to purchase 95% of planned annual production, subject to a maximum commitment of 3.8 billion pounds, and includes an option for additional production. Management says this structure limits direct commodity-price exposure, but third-party sales, co-product prices, and customer demand remain risks. Westlake accounted for approximately 81% of first-half sales.
- No earnings guidance is provided. Management expected 2015 capital expenditures of approximately $233 million. The planned Petro 1 expansion, targeted for the first half of 2016, was estimated to cost $275–$335 million and add approximately 250 million pounds of annual ethylene capacity; approximately $114.4 million had been incurred by June 30.
- Management said existing liquidity sources were expected to meet working-capital and capital-spending needs and support distributions, but future funding depends in part on operations and Westlake financing. The filing notes Westlake is not obligated to fund future expansion spending or capitalize the MLP revolver lender.
- Environmental matters include EPA discussions concerning possible flare modifications and potential CERCLA obligations at Calvert City. Westlake disputed alleged flare noncompliance; corrective actions could increase costs. PolyOne seeks approximately $1.4 million in a stayed arbitration over remediation-cost allocation. A possible Louisiana violations settlement of approximately $0.2 million would cover partnership and Westlake assets; applicable pre-IPO liabilities are subject to Westlake indemnification.
- Proposed federal tax regulations could make it difficult or impossible for the partnership to retain partnership tax status after a proposed ten-year transition period. The partnership had previously received a favorable IRS private letter ruling and was participating in the regulatory comment process.
Key facts for investors to verify
- How the Ethylene Sales Agreement’s cost-plus terms, volumes, and co-product pricing affect margins and distributable cash flow.
- Westlake’s capacity and willingness to finance capital expenditures, future acquisitions, and the MLP revolver.
- Progress, total cost, and funding for the Petro 1 expansion and the company’s full-year capital-spending plan.
- Environmental proceedings, potential flare-related requirements, remediation exposure, and the scope and collectability of Westlake indemnities.
- The final form and effect of tax regulations on qualifying income and the partnership’s tax status.
- Ability to sustain distributions, which management states are discretionary and not guaranteed.