Westlake Chemical Partners LP — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The Partnership operates and controls Westlake Chemical OpCo LP, which owns ethylene facilities and a pipeline. At June 30, the Partnership held a 22.8% limited partner interest in OpCo; Westlake held the remaining 77.2%. The reported consolidated results include all of OpCo, with Westlake’s share shown as noncontrolling interest.
Financial performance and position
- Second-quarter sales: $270.1 million, down 10.6% from $302.0 million. Sales prices fell 12.1% year over year, partly offset by 1.5% higher sales volumes.
- Second-quarter earnings: Gross profit was $92.0 million versus $97.1 million; income from operations was $84.3 million versus $89.7 million; consolidated net income was $80.1 million versus $84.5 million. Net income attributable to the Partnership rose to $13.7 million from $12.8 million. Basic and diluted earnings per unit were $0.39 versus $0.40.
- Six-month results: Sales were $569.1 million versus $586.2 million; consolidated net income was $158.5 million versus $165.2 million; Partnership-attributable net income was $28.7 million versus $25.1 million. MLP distributable cash flow, a non-GAAP measure, was $34.0 million versus $30.5 million; EBITDA, also non-GAAP, was $223.7 million versus $231.5 million.
- Margins: Second-quarter gross margin was approximately 34.1% versus 32.2% a year earlier; six-month gross margin was approximately 32.1% versus 32.4%. The filing attributes weaker operating performance mainly to lower third-party ethylene prices and margins.
- Cash flow: Six-month operating cash flow was $213.7 million, down from $220.6 million. Capital expenditures were $25.6 million. Cash and cash equivalents declined to $17.5 million from $19.7 million at year-end 2018.
- Liquidity and debt: Current assets were $222.4 million and current liabilities $36.3 million. The Partnership also had $141.3 million invested with Westlake under an agreement providing daily availability of funds. Debt payable to Westlake was $399.7 million, all variable rate, at a 4.6% weighted-average rate; the Partnership reported compliance with revolver covenants. Total assets were $1.411 billion and total liabilities $438.8 million.
- Distributions: The general partner approved a $0.4579-per-unit quarterly distribution after quarter-end, payable August 26, 2019. The Partnership states it has no legal or contractual obligation to pay distributions at any particular rate.
Material changes and management commentary
- The Partnership issued 2,940,818 common units in a March private placement, receiving net proceeds of approximately $62.9 million, and used the proceeds together with revolver borrowing to purchase an additional 4.5% interest in OpCo. Its OpCo interest increased to 22.8%, effective January 1, 2019.
- In April, the Partnership repaid $201.4 million under the OpCo Revolver. At June 30, borrowings were $22.6 million on that facility and $377.1 million on the MLP Revolver.
- Management cited lower third-party sales prices and margins as the primary reason consolidated net income and EBITDA declined. Partnership-attributable income and distributable cash flow increased primarily because of the larger OpCo ownership interest; six-month distributable cash flow also benefited from elimination of distributions on incentive distribution rights following a 2018 amendment.
- The Ethylene Sales Agreement with Westlake is long-term and fee-based, with a minimum purchase commitment generally equal to 95% of budgeted production and pricing tied to production costs plus a fixed margin. Westlake accounted for approximately 85.2% of second-quarter sales and 85.6% of six-month sales.
Outlook, risks and contingencies
- No specific earnings or operating guidance is provided. Management said the private placement proceeds meant it expected no further need to access equity markets during the remainder of 2019. It believes operating cash, revolvers and other potential financing sources will meet liquidity and capital needs, but Westlake is not obligated to provide additional financing.
- Key exposures include ethylene and feedstock price volatility, operating interruptions, maintenance and turnaround spending, environmental regulation, access to capital, and customer concentration. Management says the cost-plus agreement and minimum commitment substantially mitigate commodity exposure on sales to Westlake; direct commodity exposure is primarily the approximately 5% of production sold to third parties.
- All debt is variable rate and owed to Westlake affiliates. The filing estimates a 100-basis-point rate increase would raise annual interest expense by approximately $4.0 million, based on the June 30 debt balance.
- The EPA flare matter may require corrective action and a monetary sanction; the Partnership states it believes the sanction may exceed $100,000. A separate Risk Management Program matter was resolved by a June 25, 2019 consent order, with a reported $49,000 penalty and a $184,000 supplemental environmental project. Westlake has agreed to indemnify the Partnership for certain pre-August 2014 liabilities. The Partnership says other legal proceedings are not expected to have a material adverse effect.
- The Partnership reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How sustainable are third-party ethylene prices and margins, and what is the resulting effect on earnings and cash generation?
- What are the terms, covenant headroom and refinancing implications of the Westlake-affiliated revolvers, and how accessible is the cash invested with Westlake?
- How does the 22.8% OpCo interest translate into Partnership-level cash available for distributions, given the 77.2% noncontrolling interest and maintenance needs?
- What is the expected cost, timing and resolution of the EPA flare matter, and is the reported potential sanction amount stated in dollars or another basis?
- Can distributions be sustained when declared distributions exceeded Partnership-attributable net income by $2.4 million in the second quarter and $3.1 million for the first six months?