Westlake Chemical Partners LP — Q2 2018 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2018, compared with 2017. The Partnership controls and consolidates OpCo, which owns three ethylene production facilities and a pipeline, but holds only an 18.3% limited partner interest; Westlake owns the remaining 81.7%. Most revenue comes from Westlake under a long-term, cost-based ethylene sales agreement.
Financial highlights
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $302.0 million | $290.1 million | $586.2 million | $567.6 million |
| Gross profit | $97.1 million | $99.6 million | $189.6 million | $197.5 million |
| Gross margin | 32.2% | 34.3% | 32.3% | 34.8% |
| Consolidated net income | $84.5 million | $86.5 million | $165.2 million | $172.5 million |
| Net income attributable to the Partnership | $12.8 million | $10.0 million | $25.1 million | $19.7 million |
| MLP distributable cash flow | $16.0 million | $11.0 million | $30.5 million | $22.4 million |
| EBITDA | $117.9 million | $120.0 million | $231.5 million | $241.9 million |
For the six months, operating cash flow was $220.6 million, down from $262.3 million. Investing activities used $23.4 million, including $16.6 million of capital additions; financing activities used $195.7 million, primarily for distributions. Cash increased $1.5 million to $28.5 million. The filing reports $143.7 million receivable under the Investment Management Agreement at quarter-end, including accrued interest; MD&A separately cites $143.2 million invested. The filing does not explain this difference clearly.
At June 30, total debt payable to Westlake was $477.6 million, versus $474.0 million at year-end 2017. The weighted-average rate was 4.61%, up from 3.76%. Debt comprised $224.1 million under the OpCo Revolver (LIBOR + 3.0%, scheduled maturity August 2019) and $253.5 million under the MLP Revolver (LIBOR + 2.0% at the reported balance, scheduled maturity 2021). The Partnership reported covenant compliance. Current assets were $242.8 million and current liabilities $47.6 million; liquidity also included daily-available invested cash and Westlake revolving facilities.
Changes and management commentary
- Q2 sales rose 4.1%, while consolidated net income fell about 2.3%. Six-month sales rose 3.3%, while consolidated net income fell about 4.2%.
- Management attributed lower gross profit and EBITDA to weaker third-party sales prices and higher feedstock costs. Higher volumes, increased production at Calvert City after its 2017 upgrade project, and higher pipeline service fees partly offset the pressure.
- Partnership-attributable income and MLP distributable cash flow increased, mainly reflecting the Partnership’s additional 5% OpCo interest effective July 1, 2017; distributable cash flow also benefited from changes to incentive distribution tiers. These measures are non-GAAP.
- Operating cash flow fell mainly because the prior-year period benefited from working-capital cash inflows, including recovery of a prior Shortfall receivable from Westlake. Working capital used $0.8 million in H1 2018 versus providing $42.9 million in H1 2017.
- Westlake represented 84.0% of Q2 sales and 83.4% of first-half sales. The cost-plus agreement and minimum purchase commitment mitigate much of the Partnership’s commodity exposure; direct commodity exposure is primarily the roughly 5% of production sold to third parties.
Outlook, distributions, and risks
Management estimated 2018 capital expenditures of approximately $60.4 million; $16.6 million had been spent in the first half. OpCo typically reserves approximately $30 million annually for turnarounds, and facilities require turnaround maintenance about every five years. Management stated it expects operating cash and available financing to meet working-capital, capital spending, and distribution needs, but Westlake is not obligated to provide additional loans. The Partnership has no legal or contractual obligation to pay distributions at any stated rate.
After quarter-end, the general partner approved a $0.4088 per-unit quarterly distribution, payable August 24, 2018. A July 27, 2018 partnership agreement amendment raised the threshold before incentive distribution rights apply to $1.2938 per unit per quarter and revised the marginal sharing tiers above that level.
Key risks include variable-rate debt (a 100-basis-point increase was estimated to add about $4.1 million of annual interest expense), customer and related-party concentration, feedstock and energy costs, production interruptions, chemical-market volatility, access to financing, and environmental compliance. The filing describes EPA flare matters and Kentucky air notices that could require monetary sanctions in excess of $100,000, and an EPA Risk Management Program matter with an agreement in principle for a $196,000 penalty, potentially partly offset by a Supplemental Environmental Project. Westlake has agreed to indemnify certain pre-August 2014 liabilities; the Partnership states other proceedings are not expected to have a material adverse effect. No material changes to the 2017 Form 10-K risk factors were reported. Disclosure controls were assessed as effective.
Investor verification points
- Reconcile the $143.7 million balance-sheet Investment Management Agreement receivable with MD&A’s $143.2 million invested-cash figure, and confirm availability and counterparty terms.
- Review the related-party debt maturities, variable-rate exposure, covenant terms, and Westlake’s non-obligation to provide future financing.
- Assess sustainability of distributions against Partnership-attributable earnings and distributable cash flow, including the revised incentive distribution thresholds.
- Monitor third-party margins, feedstock costs, production levels, turnarounds, and the high sales concentration in Westlake.
- Track resolution and potential costs of the EPA and Kentucky environmental matters; verify the stated penalty amounts and any indemnity coverage.