Westlake Chemical Partners LP — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The partnership was formed in 2014 and completed its IPO on August 4, 2014. It controls and consolidates OpCo, which owns three ethylene production facilities and an ethylene pipeline; at quarter-end, the partnership held a 10.6% limited partner interest in OpCo, with Westlake retaining 89.4%.
Financial performance
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Net sales | $258.4 million | $560.0 million, Q1 2014 Predecessor |
| Gross profit / gross margin | $96.2 million / 37.2% | $232.3 million / 41.5% |
| Operating income | $90.2 million | $224.5 million |
| Net income | $88.4 million | $143.9 million |
| Net income attributable to partnership | $8.5 million | Not presented for predecessor period |
| Net income per limited partner unit | $0.31 | Not presented for predecessor period |
| Cash from operations | $113.2 million | $197.9 million |
| Capital expenditures | $39.5 million | $51.3 million |
Q1 2015 results are consolidated partnership results, while Q1 2014 figures are Predecessor results from before the IPO; the filing cautions that they are not directly comparable. The partnership’s $88.4 million consolidated net income included $79.9 million attributable to OpCo’s noncontrolling interest. The partnership reported $9.0 million of MLP distributable cash flow, a non-GAAP measure.
Balance sheet and liquidity
- Cash and cash equivalents were $144.9 million at March 31, 2015, versus $133.8 million at December 31, 2014. Current assets were $204.6 million and current liabilities $34.6 million.
- Debt payable to Westlake was $257.8 million, up from $227.6 million at year-end, consisting of $167.1 million of promissory notes and $90.7 million drawn on OpCo’s revolving facility. The filing reports compliance with applicable debt covenants.
- Operating cash flow less reported capital expenditures was approximately $73.7 million. Financing cash use was $62.5 million, including $92.7 million of distributions relating to Q4 2014, partly offset by $30.2 million of borrowing.
- Variable-rate debt averaged 4.23%; management estimated that a 100-basis-point increase would add about $0.39 million to quarterly interest expense at the reported debt balance.
Changes, outlook, and key risks
- Sales fell 53.9% year over year; average sales prices decreased 42.6% and sales volumes 11.3%. Management attributed the decline mainly to lower prices under the post-IPO Ethylene Sales Agreement, reduced third-party ethylene volumes after Westlake retained procurement and resale activities, and weaker co-product prices. Lower feedstock costs and Calvert City’s feedstock conversion partly offset the pressure.
- The long-term Ethylene Sales Agreement uses cost-plus pricing intended to provide a fixed margin of $0.10 per pound and includes Westlake’s commitment to purchase 95% of planned annual production, subject to a 3.8-billion-pound cap. Westlake is the principal customer and accounted for 80.9% of Q1 sales.
- Management expected 2015 capital expenditures of approximately $233 million; $39.5 million had been spent in Q1. A planned Petro 1 upgrade and expansion for the first half of 2016 was estimated at $275 million to $335 million, adding about 250 million pounds of annual capacity. Westlake was expected to fund future expansion borrowing, but was not obligated to do so.
- On April 29, 2015, the partnership acquired an additional 2.7% OpCo interest for approximately $135.3 million, bringing its interest to approximately 13.3%. It entered a $300 million Westlake-affiliate revolver to fund the acquisition; $135.3 million was outstanding as of April 30. The partnership said it intended to use the facility for potential future OpCo interest purchases.
- The board declared a Q1 2015 distribution of $0.2829 per unit, or $7.655 million in total, payable May 27 to holders of record May 12. Management stated an intention to pay a minimum quarterly distribution of $0.2829 per unit, but noted there is no legal or contractual obligation to make distributions at that rate.
- Risks include commodity-market and operating variability, reliance on Westlake for sales, feedstock, services and financing, and environmental matters. EPA discussions over alleged flare compliance issues could lead to corrective actions and higher costs; CERCLA-related site investigations may also create obligations. A Louisiana violations settlement of approximately $0.2 million was under discussion. Westlake indemnifies the partnership for certain pre-August 4, 2014 liabilities.
- Proposed federal tax regulations could make it difficult or impossible for the partnership to retain partnership tax treatment after a proposed ten-year transition period, depending on final rules. Management also warned that Westlake might be unable or unwilling to fund the affiliate lender under the MLP Revolver.
Important facts for investors to verify
- Reconcile the prior-year comparison with the post-IPO changes in revenue recognition, third-party activities, taxes, and noncontrolling interest; these make reported year-over-year declines non-like-for-like.
- Review the Ethylene Sales Agreement’s minimum purchase terms, pricing formula, and exposure to any production or sales not covered by Westlake commitments.
- Confirm funding needs, borrowing capacity, covenants, and Westlake’s ability to support the OpCo and MLP revolvers, particularly for planned capital spending and future acquisitions.
- Track the Petro 1 expansion cost and schedule, environmental proceedings and potential flare requirements, and the outcome of proposed partnership tax regulations.
- Confirm the timing and amount of distributions and the partnership’s ability to sustain them after debt service, maintenance spending, and turnaround reserves.