Business context and reporting period
Westlake Chemical Partners LP’s Form 10-K covers the fiscal year ended December 31, 2015; it also reports unaudited fourth-quarter results. The Partnership’s sole revenue-generating asset is its 13.3% limited-partner interest in OpCo, which it controls through ownership of OpCo’s general partner. OpCo operates three ethylene-processing facilities and a 200-mile pipeline. The consolidated statements include all of OpCo, with Westlake’s 86.7% OpCo interest shown as noncontrolling interest.
OpCo sells 95% of planned ethylene production to Westlake under a long-term cost-plus agreement, with a stated $0.10-per-pound margin; third-party sales and coproducts provide additional revenue. The 2014 annual comparison combines predecessor results before the August 2014 IPO with Partnership results after the IPO, and is therefore not fully comparable.
Key financial metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $1,007.2 million | $1,749.7 million |
| Gross profit / gross margin | $382.9 million / 38.0% | $745.8 million / 42.6% |
| Income from operations | $359.3 million | $716.6 million |
| Net income, consolidated | $353.9 million | $509.8 million |
| Net income attributable to Partnership and limited partners after noncontrolling interest | $39.8 million; $1.47 per unit | $13.6 million; $0.50 per unit |
| Cash from operating activities | $452.5 million | $604.0 million |
| Capital expenditures | $231.2 million | $202.8 million |
| EBITDA (non-GAAP) | $440.7 million | $797.3 million |
| MLP distributable cash flow (non-GAAP) | $37.7 million | $13.8 million |
At December 31, 2015, cash and cash equivalents were $169.6 million, working capital was $167.6 million, total assets were $1,290.3 million, and total debt payable to Westlake was $384.0 million. Debt comprised $216.9 million under OpCo’s $600 million revolver, $135.3 million under the Partnership’s $300 million revolver, and $31.8 million of promissory notes. All debt was variable-rate; the company reported covenant compliance and an interest-rate contract hedging part of the MLP Revolver exposure. The 2015 cash distribution was $1.18 per unit. A $0.308-per-unit fourth-quarter distribution was announced after year-end and paid in February 2016.
For Q4 2015, net sales were $248.5 million, gross profit $98.0 million, operating income $92.3 million, net income $91.2 million, and earnings per common and subordinated unit $0.40.
Material changes versus the prior comparable period
- Full-year net sales fell 42.4%; management attributed the decline primarily to lower ethylene and coproduct prices and lower third-party ethylene sales volumes. Overall average sales prices fell 38.0% and sales volumes fell 4.4%.
- Operating income decreased by $357.2 million and consolidated net income by $156.0 million. The filing cites lower margins following the Ethylene Sales Agreement and weaker market prices, partly offset by lower feedstock and energy costs and lower SG&A.
- Gross margin declined to 38.0% from 42.6%. Operating cash flow fell $151.5 million, while capital expenditures increased $28.4 million.
- Debt increased from $227.6 million to $384.0 million, reflecting revolver borrowings for the additional OpCo interest purchase and capital projects; cash rose to $169.6 million.
- The Partnership bought an additional 2.7% OpCo interest for approximately $135.3 million in April 2015, taking its ownership to 13.3% effective April 1, 2015.
Outlook, risks, contingencies and unusual items
- Management planned a Petro 1 upgrade and expansion adding about 250 million pounds of annual capacity, with a projected cost of $275–$335 million; approximately $201.1 million had been incurred by year-end. Work was planned to begin in Q2 2016 and was expected to coincide with a 75–80-day downtime. A Calvert City project announced in January 2016 was expected to add about 70 million pounds annually, cost $70–$80 million, and be completed in the first half of 2017; funding was expected from OpCo borrowings.
- Management said the Westlake sales agreement and its cost-plus structure are intended to reduce direct commodity-price exposure, but third-party ethylene and coproduct sales remain exposed to market prices. It warned that lower crude-oil prices and weaker third-party prices and margins could continue to affect 2016.
- Distributions are not guaranteed: the board may change its policy, and available cash depends substantially on OpCo distributions and Westlake’s ability to meet purchase commitments. Westlake accounted for 82.9% of 2015 net sales.
- All $384.0 million of debt was owed to Westlake affiliates. Debt service, revolver covenants, Westlake-related restrictions and reliance on Westlake for feedstock, operating services and labor are material considerations.
- Environmental matters include EPA scrutiny of flares at Lake Charles and Calvert City, potential CERCLA liabilities at Calvert City, and Louisiana air-quality notices. Potential flare controls could increase costs; ultimate outcomes and amounts are uncertain. Westlake agreed to indemnify the Partnership for specified pre-IPO liabilities. The PolyOne arbitration over Calvert City remediation costs was dismissed with prejudice in December 2015.
- Proposed IRS qualifying-income regulations could threaten partnership tax treatment after a proposed ten-year transition period if finalized in their current form; loss of partnership treatment could materially reduce distributable cash.
- Environmental-compliance capital expenditures were $5.4 million in 2015; estimates were $9.9 million for 2016 and $9.4 million for 2017.
Most important facts for investors to verify
- Assess underlying performance using the full-year results while accounting for the 2014 predecessor/IPO reporting mismatch and the Partnership’s 13.3% economic interest in consolidated OpCo.
- Review Westlake’s creditworthiness and the Ethylene Sales Agreement’s purchase obligations, exceptions, cost-recovery provisions and renewal terms.
- Track expansion spending, financing, schedule, planned turnaround downtime and resulting production or cash-flow effects.
- Confirm debt balances, available revolver capacity, leverage-covenant headroom, variable-rate exposure and the extent of interest-rate hedging.
- Monitor the EPA flare process, Calvert City contamination proceedings, potential remediation costs and the scope of Westlake’s indemnities.
- Follow final IRS regulations and any developments affecting qualifying income, partnership status and unitholder tax consequences.
- Distinguish the reported non-GAAP EBITDA and distributable-cash-flow measures from GAAP cash flow and from cash available for distribution; neither measure alone establishes distribution coverage.