Westlake Chemical Partners LP — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The Partnership operates ethylene facilities and a pipeline through OpCo, in which it owns a 22.8% limited partner interest and controls the general partner. Westlake owns the remaining 77.2% of OpCo and is the Partnership’s principal customer and lender.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $415.1 million | $294.0 million | $1,226.3 million | $884.4 million |
| Gross profit | $90.5 million | $75.9 million | $279.2 million | $294.7 million |
| Gross margin | 21.8% | 25.8% | 22.8% | 33.3% |
| Income from operations | $81.8 million | $68.1 million | $252.4 million | $269.9 million |
| Consolidated net income | $78.3 million | $66.1 million | $243.6 million | $263.0 million |
| Net income attributable to the Partnership | $14.8 million | $12.8 million | $47.4 million | $53.0 million |
| MLP distributable cash flow | $16.7 million | $13.0 million | $55.6 million | $54.8 million |
| EBITDA | $111.8 million | $94.7 million | $344.8 million | $352.8 million |
- Quarterly performance: Sales rose 41.2% year over year, driven by higher sales prices and volumes, stronger production after the prior-year Petro 2 turnaround, and a $13.9 million buyer deficiency fee. Operating income and Partnership-attributable income also increased. Higher ethane and natural gas costs weighed on margins.
- Nine-month performance: Sales increased 38.7%, but gross profit, operating income, consolidated net income, Partnership-attributable income and EBITDA declined. The filing cites higher feedstock and natural gas costs, weaker third-party ethylene sales, and a lower deficiency/shortfall fee contribution than in 2021. Average sales prices increased 28.4% and sales volume increased 12.1%.
- Cash flow: Operating cash flow was $341.2 million for the first nine months, down from $386.6 million. The filing attributes the decline mainly to less cash provided by working capital. Capital expenditures were $45.5 million, compared with $38.5 million. Investing activities used $74.5 million; financing activities used $264.3 million, primarily distributions.
- Liquidity and debt: September 30 cash was $19.5 million, with $135.9 million invested with Westlake under an agreement providing daily availability. Debt payable to Westlake totaled $399.7 million, all variable rate; the weighted-average rate was 3.4%. The filing estimates a 100-basis-point rate increase would add about $4.0 million to annual interest expense. Revolver maturities were extended to July 12, 2027, and LIBOR was replaced with SOFR. The Partnership reported compliance with debt covenants.
- Distributions: The quarterly distribution was maintained at $0.4714 per unit; the board declared the same amount for Q3, payable November 28, 2022. Distributions declared were $16.6 million in Q3 and $49.8 million for nine months, versus Partnership-attributable income of $14.8 million and $47.4 million, respectively.
Management commentary, outlook and risks
- The Ethylene Sales Agreement is a long-term, cost-plus arrangement with Westlake, including an annual minimum purchase commitment equal to 95% of budgeted production. Management says this substantially mitigates commodity-price exposure; direct exposure is primarily the approximately 5% of ethylene production sold to third parties. No derivatives were open at quarter-end.
- No specific earnings or production guidance is provided. Management expects available operating cash, revolvers and other potential financing sources to meet near- and long-term needs and support quarterly distributions, but distributions are not contractually guaranteed. Westlake is not obligated to provide additional financing or fund future expansion capital expenditures.
- Westlake accounted for 87.8% of Q3 sales and 83.2% of nine-month sales. This customer and related-party concentration is a material dependency. Receivables, debt, investments and significant operating transactions are also with Westlake.
- Environmental consent decree: a June 2022 agreement requires flare-control and monitoring measures and a $1 million penalty; implementation costs are estimated at approximately $110 million. The costs are expected to be fully indemnified by Westlake. The decree becomes effective upon court entry.
- Lawsuits remain pending from the September 2021 Petro 2 flash fire. The Partnership expects insurance to cover most associated costs. The filing says other proceedings are not expected to materially adversely affect financial condition, results or cash flows.
- Risks highlighted include variable-rate debt and interest-rate increases, volatile feedstock and energy costs, operating interruptions, chemical-market cyclicality, environmental regulation, customer creditworthiness, and supply-chain and workforce constraints. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $13.9 million buyer deficiency fee is collected as expected and how production and Westlake offtake develop.
- Ethane and natural gas cost trends, third-party sales economics, and whether margins recover from the year-to-date decline.
- Westlake’s ability and willingness to meet purchase, payment, financing and indemnification obligations, given the high related-party concentration.
- SOFR-linked borrowing costs, covenant headroom and liquidity available under the revolvers.
- Actual costs, timing and court entry of the flare consent decree, and the extent of Westlake indemnification; also the progress and insurance coverage of Petro 2 litigation.
- Distribution coverage: declared distributions exceeded Partnership-attributable income in Q3 and for the first nine months, while the distribution itself is not guaranteed.