Westlake Chemical Partners LP — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014. The Partnership completed its IPO on August 4, 2014, so Q3 2014 combines Predecessor results before the IPO with consolidated Partnership results afterward. Comparisons with 2013 and the balance-sheet comparison with year-end 2013 are not fully like-for-like.
Business context
The Partnership operates ethylene production assets through OpCo, which owns three production facilities and a 200-mile pipeline. After the IPO, the Partnership owned 10.6% of OpCo and controlled it through its general partner; Westlake retained 89.4% of OpCo and significant interests in the Partnership. A 12-year agreement requires Westlake to purchase at least 95% of planned ethylene production, subject to a 3.8-billion-pound annual cap. Contract pricing is designed to cover specified costs and provide a $0.10-per-pound margin, net of associated co-product proceeds.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $392.0 million | $540.1 million | $1,476.2 million | $1,565.8 million |
| Gross profit | $165.0 million | $213.0 million | $643.9 million | $641.1 million |
| Gross margin | 42.1% | 39.4% | 43.6% | 40.9% |
| Income from operations | $156.1 million | $206.6 million | $621.1 million | $621.8 million |
| Net income | $118.2 million | $132.6 million | $415.9 million | $402.3 million |
- Q3 sales fell 27.4% and net income fell 10.9% year over year. Management attributed lower sales mainly to the new Westlake sales agreement and Westlake’s retention of certain prior business activities; lower co-product volumes and prices also contributed. Lower feedstock costs after the Calvert City conversion partly offset lower ethylene margins.
- Nine-month sales declined 5.7%, while net income increased 3.4%. Operating income was essentially unchanged. Lower feedstock costs, including reduced reliance on propane, helped offset lower ethylene margins and costs and lost production from Calvert City turnaround, conversion and expansion work.
- Q3 net income attributable to the Partnership after the IPO was $5.0 million, or $0.19 per common and subordinated unit. The reported $118.2 million of Q3 net income includes $63.6 million earned by the Predecessor before the IPO and $49.5 million attributable to OpCo’s noncontrolling interest.
- Nine-month operating cash flow was $486.0 million, versus $415.5 million in 2013; investing cash use was $144.5 million, primarily capital expenditures. Financing activities used $251.5 million, including pre-IPO distributions to Westlake and IPO-related transactions. These cash-flow totals include Predecessor activity and are not standalone post-IPO Partnership measures.
- At September 30, cash was $90.0 million; current assets were $153.9 million and current liabilities $35.0 million. Debt payable to Westlake totaled $188.5 million: $168.4 million under promissory notes and $20.1 million under a revolving facility. Debt is variable-rate. A 100-basis-point rate increase was estimated to raise annual interest expense by about $0.6 million at the reported balance.
- Westlake provides a $600 million intercompany credit facility for growth and working capital. The filing says Westlake may provide future financing but is not obligated to do so. No off-balance-sheet arrangements were reported.
Outlook, distributions and risks
- Management expected 2014 capital expenditures of approximately $199.4 million; $144.3 million had been spent in the first nine months. The planned Petro 1 upgrade and expansion was estimated at $250–$310 million, targeted for late 2015 to early 2016, and expected to add about 250 million pounds of annual capacity.
- Management intended to reserve approximately $29.3 million annually for turnarounds. The IPO funded an initial $55.4 million turnaround reserve. Management believed available sources could meet near- and long-term needs, but future Westlake financing is not committed.
- The Partnership stated an intention to pay a minimum quarterly distribution of $0.2750 per unit, but has no legal or contractual obligation to pay that amount. On October 28, the board declared an initial prorated distribution of $0.1704 per unit, totaling $4.6 million, payable November 25, 2014.
- Westlake accounted for approximately 73.9% of Q3 sales and 73.7% of nine-month sales. This customer concentration and dependence on related-party feedstock, services, financing and the long-term sales agreement are important exposures.
- The Partnership had no open derivative positions after the IPO and reported no hedging activity. Commodity-price and operating risks remain, including exposure on third-party sales and co-products, production interruptions, maintenance and turnaround costs, and interest-rate risk.
- Environmental proceedings relate to contamination at Calvert City. The Partnership said it could not estimate any possible loss for the Predecessor, but stated that Westlake indemnifies OpCo for pre-existing contamination and OpCo indemnifies Westlake for post-closing contamination caused by its operations. Routine legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- How actual distributions and OpCo cash available for distribution compare with the stated $0.2750 quarterly target and the initial prorated payment.
- OpCo’s production, planned volumes, contract pricing and performance under the Westlake purchase commitment, including the 3.8-billion-pound cap and any exceptions.
- Whether capital spending, turnaround reserves and the Petro 1 project remain within the stated estimates, and how they will be financed.
- The terms and ongoing availability of Westlake-related debt and financing, alongside the Partnership’s variable-rate exposure and Westlake’s retained control and ownership interests.
- How the business performs after the IPO on a standalone basis; reported quarterly and nine-month figures combine different entities, ownership shares and tax treatment.
- Developments in Calvert City environmental matters, indemnification protections and any changes to the major-customer concentration.