Westlake Chemical Partners LP — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. The Partnership owns a 13.3% limited partner interest in OpCo but consolidates OpCo; Westlake’s retained 86.7% is reported as noncontrolling interest.
Business context and results
OpCo operates three natural gas liquids processing facilities and a 200-mile ethylene pipeline. Its long-term, cost-plus Ethylene Sales Agreement with Westlake provides for a fixed margin and minimum purchase commitment, while third-party sales remain more exposed to market prices. Westlake represented 86.1% of Q2 sales and 89.1% of first-half sales.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $210.8 | $251.7 | $463.4 | $510.1 |
| Gross profit / margin | $88.4 / 41.9% | $94.5 / 37.5% | $198.8 / 42.9% | $190.8 / 37.4% |
| Income from operations | $82.5 | $88.5 | $186.9 | $178.8 |
| Consolidated net income | $81.2 | $87.2 | $184.0 | $175.6 |
| Net income attributable to the Partnership | $9.3 | $10.4 | $21.4 | $18.9 |
| Partnership net income per unit | $0.34 | $0.39 | $0.79 | $0.70 |
| EBITDA | $103.5 | $109.0 | $228.3 | $219.0 |
| MLP distributable cash flow | $4.3 | $9.2 | $13.8 | $18.2 |
Q2 sales fell 16.2%, as total sales volumes were 34.0% lower year over year; higher average sales prices, including a $47.3 million production-cost Shortfall recovery, partly offset the volume decline. First-half sales fell 9.2%, while consolidated net income rose 4.7%, helped by a $56.5 million Shortfall recovery. Higher Shortfall revenue lifted gross margins, but distributable cash flow declined in both comparison periods.
Cash flow, balance sheet and capital
- First-half operating cash flow was $185.3 million, versus $229.9 million a year earlier. Investing cash outflow was $168.4 million, including $168.5 million of PP&E additions; financing cash outflow was $35.1 million. Cash declined to $151.3 million from $169.6 million at year-end.
- At June 30, total debt payable to Westlake was $515.3 million, up from $384.0 million at year-end; all debt was variable-rate, with a weighted-average rate of 3.45%. The Partnership reported covenant compliance. A 100-basis-point rate increase was estimated to add approximately $4.5 million to annual interest expense, excluding the effectively fixed portion.
- Total current assets were $222.6 million and current liabilities $170.8 million. The balance sheet also included a $28.2 million noncurrent receivable from Westlake. The Partnership relies on Westlake-related facilities for financing and has significant related-party balances.
- Full-year 2016 capital expenditures were estimated at approximately $293 million, including expansion, maintenance and turnaround costs; $218.9 million had been spent in the first half. The Lake Charles Petro 1 expansion, completed in July, is expected to add about 250 million pounds of annual ethylene capacity.
Outlook, developments and risks
- Management expected the Calvert City expansion to add approximately 70 million pounds of annual capacity, targeted for completion in the first half of 2017, at an estimated cost of $70–$80 million, funded through the OpCo Revolver. About $21.8 million had been incurred by June 30. These are management estimates, not guaranteed outcomes.
- Calvert City had an unplanned mechanical shutdown beginning June 1 and restarted in mid-July after 46 days. Under the sales agreement, Westlake’s minimum-purchase obligation may be reduced for the portion of a force majeure event beyond 45 days. Lake Charles Petro 1 was also undergoing a planned turnaround and expansion during Q2; the work was completed in July.
- Third-party ethylene and co-product sales face commodity-price and demand exposure. Management noted crude-oil price declines and potential volatility in third-party prices and margins. Operating outages, maintenance needs and capital-project execution may also affect production and cash generation.
- Environmental matters include EPA discussions concerning flare compliance and possible corrective actions, CERCLA/RCRA proceedings at Calvert City, and Louisiana air-compliance notices. Westlake has indemnification obligations for certain pre-August 4, 2014 liabilities; the filing does not quantify the potential cost of all proceedings. A verbal agreement with Louisiana regulators contemplated $192,000 in combined civil penalties.
- A $0.3259 per-unit quarterly distribution, plus $46,000 to incentive distribution rights holders, was declared July 27, payable August 23, 2016. The Partnership states it has no legal or contractual obligation to maintain distributions at any particular rate. An August 4 amendment to the Ethylene Sales Agreement revised pricing treatment for Westlake purge-gas processing.
Key investor verification points
- Confirm whether production and sales volumes recovered following the Calvert City restart and Lake Charles Petro 1 project, and assess any continuing force majeure impact.
- Track realization of the Shortfall recoveries and whether they reflect timing of cost reimbursement rather than recurring operating performance.
- Verify the cost, schedule, funding and expected returns of the Calvert City expansion and remaining 2016 capital program.
- Monitor variable-rate debt, borrowing capacity, covenant headroom and reliance on Westlake for financing and commercial arrangements.
- Assess environmental proceedings, potential flare-related capital or operating costs, and the scope and collectability of Westlake indemnities.
- Evaluate distribution coverage using Partnership-level distributable cash flow, which was $4.3 million in Q2 against the declared distribution framework; do not equate consolidated OpCo cash flow with cash available to public unitholders.