Westlake Chemical Partners LP annual report, FY2017

Business Context and Reporting Period

Westlake Chemical Partners LP filed this Form 10-K for the fiscal year ended December 31, 2017; it also reports fourth-quarter results. The Partnership’s business is its 18.3% limited-partner interest in Westlake Chemical OpCo LP (OpCo), which it controls through OpCo’s general partner and consolidates. OpCo operates three U.S. ethylene plants with combined capacity of approximately 3.72 billion pounds annually and a 200-mile pipeline.

OpCo’s principal revenue source is a long-term agreement under which Westlake is committed to buy 95% of planned ethylene production, subject to exceptions and a 3.8-billion-pound annual cap. Pricing is cost-based and includes a fixed $0.10-per-pound margin. Westlake held 81.7% of OpCo and 43.8% of the Partnership at year-end. Accordingly, consolidated results below include OpCo’s operations, while the Partnership’s attributable earnings and distributable cash flow reflect its smaller economic interest.

Financial and Operating Results

Unless otherwise stated, dollar amounts are in millions. Financial-statement amounts are consolidated.

Fourth-quarter 2017 net sales were $308.6 million, gross profit $110.7 million, net income $98.3 million, and income attributable to the Partnership $15.5 million. For fourth-quarter 2016, the corresponding figures were $293.9 million, $105.7 million, $93.6 million, and $10.9 million.

Revenue growth primarily reflected higher sales volumes to Westlake and third parties, including increased production following the Petro 1 and Calvert City expansions. Overall sales volume increased 20.5%, while the average sales price declined 1.6%. Gross profit rose on volume, but margin percentage declined, reflecting higher depreciation and amortization and a prior-year cost-recovery item. Net income was nearly flat: 2016 included approximately $63.5 million of recoverable Shortfall revenue, while 2017 had higher depreciation and amortization, SG&A, and interest expense. Partnership-attributable earnings increased mainly due to the additional 5% OpCo interest acquired effective July 1, 2017.

Operating cash flow improved partly because of working-capital movements and collection in 2017 of the 2016 Shortfall and buyer-deficiency receivables. Investing cash use was $203.2 million, including $136.2 million placed with Westlake under the investment-management agreement. Financing cash use was $396.0 million, including distributions and debt repayments, partly offset by the unit offering and revolver borrowings.

Liquidity, Debt and Distributions

At year-end, cash was $27.0 million and the receivable under the Westlake investment-management agreement was $136.5 million, including accrued interest. Working capital was $191.1 million. Total debt payable to Westlake was $474.0 million, down from $594.6 million; the remaining balance comprised $220.4 million under OpCo’s revolver, due in 2019, and $253.5 million under the Partnership’s revolver, due in 2021. The Partnership repaid the remaining $31.8 million of its 2013 promissory notes. The Partnership reported compliance with its revolver covenants. All debt was variable-rate, though a portion had an interest-rate contract; management estimated a 100-basis-point rate increase would add approximately $4.1 million to annual interest expense.

The Partnership’s revolver capacity was increased from $300 million to $600 million and its maturity extended to April 2021. The board declared a $0.3864-per-unit distribution for fourth-quarter 2017, payable February 23, 2018. The stated policy intends a minimum $0.2750 quarterly distribution only when sufficient cash is available; the Partnership agreement does not require distributions.

Outlook, Risks and Unusual Items

• No specific financial or distribution guidance is provided. Management said available liquidity sources were expected to meet short- and long-term needs, but future borrowing or funding support from Westlake is not assured.
• Westlake accounted for 83.0% of 2017 net sales. The Partnership’s cash generation and distributions therefore depend heavily on Westlake’s creditworthiness, purchases, and compliance with related-party contracts.
• EPA flare-emissions and Risk Management Program matters, and two Kentucky air-quality notices of violation, were under discussion with regulators. The Partnership said each resolution may require a monetary sanction exceeding $100,000. The filing does not state a clear aggregate exposure or final resolution.
• Environmental-compliance capital expenditures were $1.3 million in 2017; estimates were $1.2 million for 2018 and $2.2 million for 2019. The Partnership stated pending proceedings were not expected to have a material adverse effect.
• Operating hazards, outages, turnarounds, weather, feedstock availability, commodity cycles, environmental rules, and variable interest rates could affect results. Each facility is expected to undergo a turnaround roughly every five years, typically involving 25–45 days of downtime.
• Westlake controls the general partner and provides employees, services, feedstock, and financing. Related-party transactions, expense reimbursements, and governance conflicts are material investor considerations. The Partnership reported $156.3 million paid for reimbursable expenses in 2017.
• Management and the auditor reported effective internal control over financial reporting as of year-end; the auditor gave an unqualified opinion on the financial statements.

Most Important Facts for Investors to Verify

• Confirm the distinction between consolidated OpCo results and the Partnership’s 18.3% economic interest; evaluate Partnership-attributable earnings and distributable cash flow rather than consolidated net income alone.
• Review the drivers and cash timing of the $63.5 million 2016 Shortfall recovery, the buyer-deficiency fee, and the 2017 working-capital improvement.
• Assess liquidity accessible under the Westlake investment-management agreement, related-party revolvers, maturity dates, covenant headroom, and exposure to higher interest rates.
• Verify the status, potential costs, and any recorded reserves for the EPA and Kentucky environmental matters.
• Evaluate whether production reliability, maintenance and turnaround requirements, and the completed expansions support future volumes and cash distributions.
• Review the sustainability and coverage of distributions, including incentive distribution rights, and the effects of Westlake’s control and related-party arrangements.