Business context and reporting period
Westlake Chemical Partners LP’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The Partnership consolidates Westlake Chemical OpCo LP (OpCo), which owns three ethylene production facilities and a 200-mile pipeline. The Partnership holds a 13.3% limited partner interest in OpCo; Westlake owns the remaining 86.7%. Ethylene sales to Westlake are primarily governed by a long-term, cost-based agreement.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $290.1 million | $210.8 million | $567.6 million | $463.4 million |
| Gross profit | $99.6 million | $88.4 million | $197.5 million | $198.8 million |
| Gross margin | 34.3% | 41.9% | 34.8% | 42.9% |
| Operating income | $92.7 million | $82.5 million | $182.8 million | $186.9 million |
| Consolidated net income | $86.5 million | $81.2 million | $172.5 million | $184.0 million |
| Net income attributable to the Partnership | $10.0 million | $9.3 million | $19.7 million | $21.4 million |
| Net income per unit | $0.36 | $0.34 | $0.71 | $0.79 |
| EBITDA (non-GAAP) | $120.0 million | $103.5 million | $241.9 million | $228.3 million |
| MLP distributable cash flow (non-GAAP) | $11.0 million | $4.3 million | $22.4 million | $13.8 million |
- Six-month operating cash flow was $262.3 million versus $185.3 million; investing cash outflow was $42.2 million versus $168.4 million; financing cash outflow was $204.1 million versus $35.1 million.
- Cash and cash equivalents were $104.9 million at June 30, 2017, compared with $88.9 million at December 31, 2016.
- Debt payable to Westlake totaled $588.3 million at June 30, 2017: $31.8 million under promissory notes, $421.2 million under the OpCo revolver, and $135.3 million under the MLP revolver. Weighted-average interest rate was 4.00%; all debt was variable rate, with a portion effectively fixed through an interest-rate contract. The Partnership reported covenant compliance.
Material changes versus prior comparable periods
- Q2 net sales rose 37.6%, mainly on higher sales volumes; sales volume increased 64.0% while average sales price declined 26.4%. The comparison was affected by a $44.7 million production-cost shortfall recognized in Q2 2016.
- Q2 consolidated net income increased $5.3 million, while Partnership-attributable income increased $0.6 million. Q2 gross margin fell from 41.9% to 34.3%, reflecting the prior-year shortfall benefit and higher depreciation and amortization.
- For the first half, net sales rose 22.5%, but consolidated net income declined $11.5 million and Partnership-attributable income declined $1.7 million. The prior-year period included approximately $56.5 million of recognized shortfall revenue; 2017 also had higher depreciation and amortization, SG&A, and interest expense.
- Interest expense increased to $5.9 million in Q2 from $1.2 million and to $11.4 million for the first half from $2.4 million, reflecting lower capitalized interest and higher average debt balances associated with expansion projects.
- Operating cash flow improved, aided by working-capital movements and lower turnaround-related expenditures. Capital expenditures were $44.0 million for the first half, versus $168.5 million in the prior-year period.
Outlook, risks, contingencies and unusual items
- Management expected 2017 capital expenditures of approximately $71.2 million, including expansion and maintenance spending. The Calvert City expansion was completed in April 2017 and, together with other initiatives, is expected to add approximately 100 million pounds of annual ethylene capacity, bringing facility capacity to 730 million pounds.
- On August 1, 2017, the MLP revolver maturity was extended from April 29, 2018 to April 29, 2021. The Partnership also declared a quarterly distribution of $0.3650 per unit, plus $323,000 to incentive distribution rights holders, payable August 29, 2017. Distributions are not contractually assured.
- Management stated that available cash and financing sources were expected to meet working-capital, capital-expenditure and distribution needs. Westlake may fund OpCo expansion projects but is not obligated to do so. Annual turnaround reserves are approximately $30 million.
- Westlake accounted for 83.1% of Q2 sales and 80.0% of first-half sales, creating significant customer and related-party concentration. The filing reports that direct commodity exposure is limited to about 5% of ethylene production sold to third parties; cost-based pricing and minimum purchase commitments mitigate much of the remaining exposure.
- A 100-basis-point increase in the applicable variable interest rate was estimated to increase annual interest expense by approximately $5.2 million. Risks include operating interruptions, commodity and feedstock volatility, customer creditworthiness, refinancing and environmental regulation.
- Environmental matters include EPA scrutiny of flares at Calvert City and Lake Charles, with potential corrective actions and monetary sanctions that Westlake said may exceed $100,000. Louisiana violations were settled for $192,000 in civil penalties, paid, with final resolution pending a withdrawal of Westlake’s hearing request. Westlake indemnifies the Partnership for specified pre-August 2014 liabilities.
- The Partnership recognized a $1.7 million insurance recovery in the first half related to the 2016 Calvert City shutdown. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm whether higher production volumes and the Calvert City capacity expansion translate into sustained earnings and cash distributions.
- Assess dependence on Westlake for sales, feedstock, services, financing and treasury functions, including the terms and ongoing operation of related-party agreements.
- Monitor variable-rate debt, revolver availability and covenants, and the effect of interest-rate changes on cash available for distributions.
- Compare distributable cash flow with declared distributions and required turnaround and maintenance spending; distributable cash flow is a non-GAAP measure and excludes working-capital changes.
- Track resolution and potential costs of the EPA flare matter and remaining environmental proceedings.