Westlake Chemical Partners LP — Q3 2018 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2018. The Partnership owns an 18.3% limited partner interest in Westlake Chemical OpCo LP (OpCo) and controls OpCo through its general partner; Westlake owns the remaining 81.7%. OpCo operates three ethylene facilities and a 200-mile pipeline. The Partnership consolidates OpCo, so consolidated results include Westlake’s noncontrolling interest.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $363.7 million | $296.8 million | $949.9 million | $864.3 million |
| Gross profit | $93.9 million | $95.4 million | $283.5 million | $292.9 million |
| Gross margin | 25.8% | 32.1% | 29.8% | 33.9% |
| Income from operations | $88.0 million | $88.6 million | $263.1 million | $271.4 million |
| Consolidated net income | $83.8 million | $82.2 million | $249.0 million | $254.7 million |
| Net income attributable to the Partnership | $12.4 million | $13.4 million | $37.5 million | $33.1 million |
| MLP distributable cash flow | $15.0 million | $15.5 million | $45.5 million | $37.9 million |
| EBITDA | $115.6 million | $117.8 million | $347.0 million | $359.8 million |
| Net income per common unit | $0.38 | $0.47 | $1.14 | $1.23 |
Cash flow and liquidity. For the nine months, operating cash flow was $330.0 million, down from $401.9 million; investing cash outflow was $45.0 million, versus $173.8 million; and financing cash outflow was $295.0 million, versus $299.8 million. Cash declined $10.0 million to $17.0 million. Capital expenditures were $30.0 million. The filing attributes the operating cash flow decline principally to lower operating income and an unfavorable working-capital comparison, including Westlake receivables.
At September 30, 2018, long-term debt payable to Westlake was $477.6 million: $224.1 million under the OpCo Revolver and $253.5 million under the MLP Revolver. Both bore variable-rate interest; the weighted-average rate was 4.34%. The OpCo Revolver’s maturity was extended to September 25, 2023, and its margin reduced from 3% to 2%. The MLP Revolver has a $600 million capacity and is scheduled to mature in 2021. The Partnership reported covenant compliance. Cash invested under the Investment Management Agreement was reported as $151.2 million in MD&A; the balance sheet reports a $151.9 million receivable under that agreement. The filing says cash and available facilities are expected to cover working capital, capital expenditures and distributions, while noting Westlake is not obligated to provide additional financing.
Material changes and management commentary
- Q3 sales rose 22.5%, driven by higher sales prices and volumes to Westlake and higher third-party co-product sales and pipeline fees. Product sales price and volume contributions to the increase were reported as 17.7% and 4.9%, respectively.
- Despite higher sales, Q3 gross profit fell, primarily because of lower margins on third-party ethylene sales. Partnership-attributable income also declined year over year, while consolidated net income increased, partly due to a state income tax benefit.
- For the nine months, sales increased 9.9%, but lower third-party ethylene margins reduced gross profit and consolidated net income. Partnership-attributable income increased, reflecting in part the 5% increase in its OpCo interest effective July 1, 2017.
- The Partnership declared a Q3 distribution of $0.4088 per common unit and, after quarter-end, declared $0.4207 per unit payable November 26, 2018. It amended incentive distribution thresholds in July 2018; the reported Q3 distribution did not trigger IDR payments.
- An at-the-market equity program established in October permits sales of up to $50 million of common units. Proceeds, if any, are intended for general partnership purposes, including potential acquisitions and drop-downs. No specific earnings or distribution guidance is provided.
Risks, contingencies and unusual items
- Westlake accounted for 86.2% of Q3 sales and 84.4% of nine-month sales. The Ethylene Sales Agreement is intended to provide a long-term fixed cash margin per pound, but direct commodity exposure remains on roughly 5% of ethylene production sold to third parties. Third-party ethylene margins were a key earnings pressure.
- All $477.6 million of debt was variable-rate. The filing estimates that a 100-basis-point increase in average rates would raise annual interest expense by approximately $4.8 million. The interest-rate contract on part of the MLP Revolver expired in August 2018.
- Environmental matters include an EPA flare investigation, for which the EPA indicated it sought corrective action and a monetary sanction potentially exceeding $100,000; an EPA Risk Management Program matter with an agreement in principle for a $196,000 penalty, potentially partly offset by an environmental project; and Kentucky air-quality notices resolved by an August 2018 order requiring corrective actions and a $175,000 penalty. The Partnership said other legal proceedings were not expected to materially affect its financial condition, results or cash flows.
- On November 1, 2018, OpCo and Westlake amended the Ethylene Sales Agreement to allow OpCo to curtail up to approximately 5% of annual production if third-party sales would be uneconomic.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the risk factors in the 2017 Form 10-K were reported.
Key facts for investors to verify
- Whether third-party ethylene margins recover and how the amended curtailment option affects production and sales.
- Westlake’s ongoing role as dominant customer, feedstock supplier, lender, cash manager and owner of the majority OpCo interest, including the terms and availability of related-party funding.
- Distribution coverage and cash generation, especially given nine-month operating cash flow declined and Q3 Partnership-attributable distributions exceeded attributable net income.
- Variable-rate debt exposure, revolver covenant headroom and the terms of any future financing or ATM unit sales.
- Resolution, costs and required corrective actions for the environmental matters described in the filing.