Westlake Chemical Partners LP annual report, FY2021

Business context and reporting period

Westlake Chemical Partners LP’s Form 10-K covers the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. The Partnership’s sole revenue-generating asset is its 22.8% limited partner interest in Westlake Chemical OpCo LP (OpCo), which it controls through ownership of OpCo’s general partner. OpCo operates three ethylene plants with approximately 3.72 billion pounds of annual capacity and a 200-mile pipeline. Westlake owns the other 77.2% of OpCo and 40.1% of the Partnership’s common units.

OpCo sells 95% of planned ethylene production to Westlake under a cost-plus contract with a $0.10-per-pound margin; third-party sales and coproducts provide the remaining market exposure. The consolidated financial statements include all of OpCo’s results, with Westlake’s 77.2% share presented as noncontrolling interest.

Financial performance and liquidity

Operating cash flow was $408.4 million, compared with $373.4 million in 2020. Capital expenditures were $81.2 million, up from $37.0 million, largely due to the Petro 2 turnaround. Cash distributions to Partnership unitholders were $66.4 million; OpCo separately distributed $277.9 million to Westlake as its noncontrolling owner. The declared 2021 distribution was $1.8856 per common unit, unchanged from 2020. A fourth-quarter distribution of $0.4714 per unit was declared in January 2022 and paid in February.

At year-end, cash and cash equivalents were $17.1 million, with a further $106.2 million invested with Westlake under the Investment Management Agreement. Debt payable to Westlake totaled $399.7 million: $22.6 million under OpCo’s revolver and $377.1 million under the MLP revolver. Both facilities mature in 2023; the weighted-average interest rate was 2.13%, and the Partnership reported covenant compliance. A 100-basis-point rate increase would add approximately $4.0 million in annual interest expense at the year-end debt balance.

Material changes versus the prior comparable period

• Revenue growth reflected higher prices, particularly on third-party sales, and $110.3 million of buyer-deficiency and Shortfall revenue in 2021, versus $69.6 million in 2020.
• Average product sales prices rose 26.8%, while sales volume declined 3.6%. Volume was affected by force majeure events and the extended Petro 2 turnaround.
• Gross profit increased, but gross margin narrowed as feedstock and conversion costs rose. Selling, general and administrative expense increased 19.7% to $31.0 million, mainly from higher service costs.
• MLP distributable cash flow declined despite higher earnings, primarily reflecting lower production, higher turnaround reserves and maintenance expense.
• Interest expense fell to $8.8 million from $12.0 million, largely due to a lower average borrowing rate.

Outlook, risks, contingencies, and unusual items

• The filing provides no quantified earnings or cash-flow guidance. Management said it expects available liquidity to be adequate for working capital, capital needs and distributions, while noting distributions are discretionary and depend on available cash.
• Three 2021 force majeure events—Petro 2’s flash fire, a Petro 1 outage and severe winter weather—generated $51.4 million of buyer-deficiency fees and $58.9 million of Shortfall revenue. The buyer-deficiency fee was collected in January 2022; the Shortfall is recoverable during 2022 under the contract. These amounts materially supported reported earnings.
• The September 2021 flash fire injured several contractors and extended the Petro 2 turnaround through December. Related lawsuits are pending; management expects insurance to cover most associated costs.
• OpCo’s 2022 and 2023 environmental-compliance capital expenditures were estimated at $2.2 million and $0.9 million, respectively. Additional EPA flare corrective-action spending was estimated at $24.9 million in 2022 and $29.8 million in 2023, with Westlake expected to bear those costs under the parties’ arrangements. The EPA matter remained unresolved in the filing.
• Major risks include dependence on Westlake for most revenue, feedstock, personnel and operating services; related-party debt and cash investments; concentrated production at three facilities and two sites; commodity-industry cyclicality; operating interruptions; environmental regulation; and the 2026 end of the initial terms of key Westlake agreements. The partnership structure also gives Westlake control and creates potential conflicts of interest.
• Westlake accounted for 84.5% of 2021 net sales. The Partnership paid approximately $185.4 million for expenses and services provided by Westlake and its affiliates; the partnership agreement does not cap reimbursable expenses.
• PwC issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue under the Ethylene Sales Agreement was identified as a critical audit matter, including the calculation of buyer-deficiency fees and Shortfall.

Most important facts for investors to verify

1. Whether buyer-deficiency fees and Shortfall are collected and recovered as expected, and how much reported earnings depended on these exceptional items.
2. Whether OpCo’s production, turnaround execution and maintenance capital spending normalize after the 2021 disruptions.
3. Refinancing or repayment plans for the $399.7 million of Westlake-related debt maturing in 2023, including the effect of LIBOR transition and variable rates.
4. Progress and cost allocation for the EPA flare matter, the related contractor litigation, and the extent of insurance coverage.
5. Westlake’s creditworthiness and continued performance under the sales, feedstock, service and cash-investment arrangements, as well as renewal plans for agreements whose initial terms end in 2026.
6. The sustainability of distributions relative to Partnership-level cash generation, debt service, turnaround reserves and related-party reimbursements.