Westlake Chemical Partners LP — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 28, 2020. The filing reports annual results and unaudited fourth-quarter results. Westlake Chemical Partners LP (“WLKP”) is a publicly traded partnership whose principal asset is a 22.8% limited partner interest in Westlake Chemical OpCo LP (“OpCo”); WLKP controls OpCo through its general partner. OpCo operates three ethylene plants with approximately 3.72 billion pounds of annual capacity and a 200-mile pipeline.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,091.9 million | $1,285.6 million |
| Gross profit / gross margin | $379.4 million / 34.7% | $377.2 million / 29.3% |
| Income from operations | $350.2 million | $349.6 million |
| Consolidated net income | $332.9 million | $330.6 million |
| Net income attributable to WLKP | $61.0 million | $49.3 million |
| Basic and diluted earnings per common unit | $1.77 | $1.51 |
| Operating cash flow | $450.8 million | $436.2 million |
| Capital expenditures | $43.7 million | $39.9 million |
| MLP distributable cash flow | $73.2 million | $60.0 million |
| EBITDA | $460.6 million | $460.9 million |
At December 31, 2019, cash and cash equivalents were $19.9 million; working capital was $199.6 million; total assets were $1.393 billion; and total debt was $399.7 million, all payable to Westlake affiliates. Debt declined from $477.6 million in 2018: OpCo Revolver borrowings fell to $22.6 million from $224.1 million, while MLP Revolver borrowings rose to $377.1 million from $253.5 million. WLKP also held $162.8 million under its investment management arrangement with Westlake, which provides for daily availability and a market return plus five basis points. All debt was variable-rate; its weighted average rate was 4.1%.
Fourth-quarter 2019 net sales were $272.8 million, gross profit $103.6 million, operating income $95.8 million, and consolidated net income $91.9 million. Net income attributable to WLKP was $17.4 million and earnings per common unit were $0.49. In fourth-quarter 2018, the corresponding amounts were $335.7 million, $93.6 million, $86.5 million, $81.6 million, $11.9 million, and $0.37.
Material changes versus prior year
- Annual sales decreased $193.7 million, or 15.1%, principally because lower feedstock and other costs reduced the cost-plus sales price charged to Westlake; sales volumes were broadly comparable.
- Gross profit was nearly unchanged, but gross margin improved to 34.7% from 29.3%, mainly due to better third-party sales margins following lower feedstock costs.
- Net income attributable to WLKP rose $11.6 million, primarily reflecting its acquisition of an additional 4.5% OpCo interest, effective January 1, 2019, and stronger third-party sales margins. WLKP’s OpCo interest increased from 18.3% to 22.8%.
- Operating cash flow increased $14.7 million, mainly from more favorable working-capital movements. Distributable cash flow increased $13.2 million; EBITDA remained essentially flat.
- WLKP issued 2,940,818 common units in a private placement for net proceeds of approximately $62.7 million and used the proceeds, together with MLP Revolver borrowings, to fund the approximately $201.4 million purchase of the additional OpCo interest.
Outlook, risks and other notable items
- OpCo’s Ethylene Sales Agreement requires Westlake to purchase at least 95% of planned annual ethylene production, subject to exceptions and a 3.8-billion-pound annual cap. Pricing is cost-plus with a fixed $0.10-per-pound margin; the initial term ends December 31, 2026. This structure mitigates much of WLKP’s direct commodity-price exposure but concentrates revenue and credit risk in Westlake.
- Westlake accounted for 85.9% of 2019 net sales. WLKP’s cash generation depends on distributions from OpCo, and OpCo’s cash generation relies substantially on payments from Westlake. The filing notes Westlake has not pledged assets to secure its obligations to OpCo.
- The board declared a fourth-quarter distribution of $0.4714 per unit, paid February 18, 2020. The partnership has no legal obligation to make distributions, and its board may change the distribution policy. The filing’s distribution disclosures are not fully consistent: one selected-data table reports $1.84 per unit for 2019, while the detailed distribution note reports $1.8005.
- Management estimated environmental-compliance capital expenditures of approximately $3.2 million in 2020 and $3.3 million in 2021, partly reflecting EPA requirements. The EPA has indicated that it believes some flares at Westlake’s Calvert City and Lake Charles facilities may not comply with applicable standards and is seeking a consent decree; WLKP believes resolution may involve a monetary sanction exceeding $100,000.
- Key operating risks include facility outages and turnarounds, aging assets, feedstock availability and cost, environmental regulation, and reliance on Westlake for feedstock, services, personnel and financing. The commercial agreements with Westlake generally become terminable beginning at the end of 2026.
- Interest-rate exposure is material: management estimated that a 100-basis-point increase in the average rate would raise annual interest expense by approximately $4.0 million. LIBOR was expected to be phased out at the end of 2021; management did not expect the transition to have a material impact.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019.
Most important facts for investors to verify
- Whether Westlake continues to meet its purchase and payment obligations, given its 85.9% share of OpCo sales and WLKP’s dependence on related-party distributions.
- The distribution record and coverage: reconcile the filing’s $1.84 versus $1.8005 annual per-unit distribution disclosures and compare declared distributions with distributable cash flow.
- Debt repayment and refinancing capacity, particularly the $377.1 million MLP Revolver scheduled to mature in April 2021, covenant compliance, and exposure to variable rates.
- Progress and potential costs of EPA flare matters and other environmental compliance obligations, including planned 2020–2021 capital spending.
- Facility reliability, turnaround timing and costs, and the ability to renew or replace Westlake commercial agreements when their initial terms end in 2026.
- Related-party governance and expense allocations: Westlake controls the general partner, and WLKP reported approximately $173 million of reimbursed expenses in 2019.