Westlake Chemical Partners LP — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 7, 2017. This is an annual filing, not a standalone fourth-quarter report. Unless noted, financial amounts below are for the consolidated Partnership and OpCo; Westlake owns 86.7% of OpCo, so consolidated net income is substantially attributable to noncontrolling interests.
Business context
The Partnership’s principal economic asset is its 13.3% limited partner interest in OpCo, which it controls through ownership of OpCo’s general partner. OpCo operates three ethylene plants and a 200-mile pipeline. Its 12-year agreement with Westlake, through 2026, requires Westlake to purchase 95% of planned ethylene output, subject to specified terms, at a cost-based price intended to provide a fixed margin of $0.10 per pound. Westlake also supplies feedstock and operating services. Westlake accounted for 86.5% of 2016 net sales.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net sales | $986.7 million | $1,007.2 million | Down 2.0%; sales volume fell 12.1%, partly offset by a 10.1% increase in average sales price. |
| Gross profit / margin | $391.3 million / 39.7% | $382.9 million / 38.0% | Margin improved, largely due to cost-recovery shortfall revenue. |
| Income from operations | $366.4 million | $359.3 million | Up 2.0%. |
| Net income | $353.4 million | $353.9 million | Nearly flat; higher interest expense offset operating improvement. |
| Net income attributable to the Partnership | $40.9 million; $1.50 per unit | $39.8 million; $1.47 per unit | Up modestly year over year. |
| Operating cash flow | $287.7 million | $452.5 million | Down $164.8 million, principally due to turnaround-related cash use and working capital. |
| Capital expenditures | $299.6 million | $231.2 million | Primarily plant expansion and upgrade spending. |
| MLP distributable cash flow (non-GAAP) | $32.4 million | $37.7 million | Down 14.1%; reflects maintenance capex and turnaround reserves. |
| EBITDA (non-GAAP) | $465.3 million | $440.7 million | Up 5.6%. |
| Cash / working capital | $88.9 million / $194.4 million | $169.6 million / $167.6 million | Cash declined; working capital increased. |
| Total debt | $594.6 million | $384.0 million | All debt was payable to Westlake affiliates; increase funded expansion and working capital. |
Debt at year-end included $427.5 million outstanding on OpCo’s $600 million revolver, $135.3 million on the Partnership’s $300 million revolver, and $31.8 million of promissory notes. The revolvers mature in 2019 and 2018, respectively; the notes mature in 2023. The filing reports covenant compliance. Debt is variable-rate, with an interest-rate contract fixing LIBOR on part of the MLP Revolver balance. A 100-basis-point rate increase on the unhedged variable-rate debt was estimated to add approximately $5.2 million to annual interest expense.
2016 distributions were approximately $1.32 per unit for the year. The board approved a $0.3450-per-unit fourth-quarter distribution, paid February 22, 2017. The Partnership states that its distribution policy is discretionary and does not create a legal obligation to distribute cash.
Material changes and unusual items
- Calvert City suffered a mechanically caused shutdown beginning June 1, 2016 and restarted in mid-July after 46 days. The event reduced production and triggered a force majeure provision. OpCo recorded a $13.1 million buyer deficiency fee, collected in January 2017.
- OpCo recognized a $63.5 million production-cost shortfall recoverable from Westlake in 2017. This was a significant contributor to higher reported average sales prices and gross margin; it also increased the Westlake receivable and contributed to working-capital cash use.
- The Lake Charles Petro 1 expansion was completed in the third quarter of 2016, adding about 250 million pounds of annual capacity. Expansion and turnaround activity contributed to lower production volumes and elevated capital spending.
- At December 31, 2016, the Calvert City expansion was in progress. Its estimated cost was $70 million–$80 million, with $38.1 million incurred by year-end; completion was targeted for the first half of 2017, funded through OpCo borrowings.
- OpCo’s guarantees under Westlake’s credit facility and senior notes were released in August 2016.
Outlook, risks and contingencies
The filing provides no formal earnings or distribution guidance. Management said it expected liquidity sources, including operating cash, Westlake-affiliate revolvers and potential additional financing, to be sufficient for anticipated needs, but Westlake is not obligated to provide future loans. The Calvert City project and planned environmental capital spending of approximately $5 million in 2017 and $6 million in 2018 are identified.
- Counterparty and concentration risk: OpCo depends heavily on Westlake for sales, feedstock, services and financing. Westlake’s purchase obligation can be suspended in certain circumstances, and its creditworthiness directly affects the Partnership’s capacity to distribute cash.
- Operations and commodity exposure: Production is concentrated at three plants on two sites and is exposed to outages, turnarounds, equipment failures and severe weather. The cost-plus agreement limits direct commodity exposure on most ethylene sales but does not eliminate third-party product exposure or the risk that Westlake cannot perform.
- Debt and distributions: Debt rose substantially and consumes cash otherwise available for distributions. The policy’s $0.2750 minimum quarterly distribution is an intention, not a contractual guarantee; distributions may be changed or suspended.
- Related-party governance: Westlake controls the general partner, holds the subordinated units and incentive distribution rights, and determines reimbursable expenses. The Partnership reported approximately $160.4 million paid for expenses and services on its behalf in 2016.
- Environmental and legal matters: Environmental laws may require material compliance or remediation spending. The EPA has raised flare-compliance concerns and indicated it is seeking a consent decree; Westlake believed a monetary sanction could exceed $100,000. Louisiana regulators were discussing settlements of notices of violation; Westlake had a verbal agreement for combined civil penalties of $192,000. Management did not believe pending proceedings would materially adversely affect the Partnership.
- Tax status: Final IRS/Treasury regulations published in January 2017 supported the Partnership’s qualifying-income treatment. Changes in tax law or successful IRS challenges could nevertheless affect partnership tax status or unitholder tax outcomes.
Important facts for investors to verify
- Collection and accounting treatment of the $63.5 million cost shortfall and the $13.1 million deficiency fee, and whether similar recoveries recur.
- Calvert City expansion completion, final cost, financing and resulting production capacity; confirm the reported target of 730 million pounds annually.
- Westlake’s ability to meet contractual purchase, feedstock and service obligations, given its share of sales and the Partnership’s reliance on affiliate financing.
- Debt maturities, revolver availability, covenant headroom, variable-rate exposure and the effect of debt service on distributable cash flow.
- Sustainability of distributions relative to the Partnership’s $32.4 million distributable cash flow, capital needs and discretionary distribution policy.
- Developments in the EPA flare matter, Louisiana notices of violation and anticipated environmental capital expenditures.