Westlake Chemical Partners LP — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; filed November 4, 2015. Amounts are in millions of dollars except per-unit data. The Partnership owns a 13.3% limited partner interest in OpCo and consolidates OpCo; Westlake retains 86.7% as noncontrolling interest.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $248.6 | $392.0 | $758.7 | $1,476.2 |
| Gross profit | $94.1 | $165.0 | $284.9 | $643.9 |
| Gross margin | 37.9% | 42.1% | 37.6% | 43.6% |
| Income from operations | $88.3 | $156.1 | $267.1 | $621.1 |
| Consolidated net income | $87.0 | $118.2 | $262.7 | $415.9 |
| Net income attributable to Partnership | $10.1 | $5.0 | $29.0 | $5.0 |
| Partnership net income per unit | $0.37 | $0.19 | $1.07 | $0.19 |
Cash flow and balance sheet: Nine-month operating cash flow was $331.2 million, down from $486.0 million; investing cash outflow was $152.6 million, primarily capital expenditures; financing cash outflow was $158.1 million. Cash increased $20.5 million to $154.3 million. At September 30, current assets were $216.4 million and current liabilities $56.5 million. Debt payable to Westlake was $330.5 million, up from $227.6 million at year-end 2014; total liabilities were $388.7 million.
Capital expenditures were $152.6 million for the first nine months. Management expected 2015 capital expenditures of approximately $233 million. The quarterly distribution declared for Q3 was $0.2994 per unit, or $8.1 million in total, payable November 27, 2015. Distributions are not contractually guaranteed.
Changes versus the prior comparable period
- Q3 net sales declined 36.6%, and nine-month sales declined 48.6%. Management attributed the reductions mainly to lower ethylene pricing under the post-IPO Ethylene Sales Agreement, reduced third-party sales, and weaker co-product prices. Average sales prices fell 31.3% in Q3 and 40.7% for the nine-month period; volumes declined 5.2% and 7.9%, respectively.
- Operating income fell to $88.3 million in Q3 and $267.1 million for nine months. Lower feedstock and energy costs partly offset lower realized prices and margins. Gross margin contracted in both comparisons.
- Comparability is limited: 2014 results combine Partnership results after the August 4, 2014 IPO with predecessor results before the IPO. The predecessor had different revenue pricing, third-party sales activities, and federal income-tax treatment.
- Partnership-attributable earnings increased from the short post-IPO comparative periods, but those figures are not directly comparable to full-period 2015 results.
Outlook, commentary, and risks
- The Ethylene Sales Agreement is a long-term, cost-plus arrangement intended to provide a fixed margin of $0.10 per pound, with Westlake committed to purchase 95% of planned annual production, subject to a 3.8-billion-pound cap. Westlake is also the feedstock supplier and the principal customer; it represented 83.6% of Q3 sales and 81.9% of nine-month sales.
- Management planned to begin the Petro 1 upgrade and capacity expansion in Q2 2016. Estimated project cost was $275 million to $335 million, with approximately 250 million pounds of annual capacity expected to be added; about $150.8 million had been incurred by September 30, 2015. Westlake is expected to provide additional project financing but is not obligated to do so.
- All $330.5 million of reported debt was variable-rate debt owed to Westlake affiliates. A 1% rate increase would add approximately $2.6 million to annual interest expense based on period-end debt. An interest-rate contract hedged the LIBOR component on part of the MLP Revolver balance.
- Key dependencies and risks include operating performance and production volumes, ethylene and co-product market conditions, feedstock and energy costs, access to Westlake financing, and Westlake’s ability to continue purchasing product and making distributions available to the Partnership.
- Environmental matters include EPA inquiries and potential corrective actions concerning flares, CERCLA-related investigation at the Calvert City site, ongoing remediation disputes, and Louisiana air-compliance notices. Potential flare controls could increase capital and operating costs. A PolyOne arbitration seeks approximately $1.4 million; a discussed Louisiana settlement could involve a total penalty of approximately $0.2 million. Westlake indemnifies certain pre-August 4, 2014 liabilities.
- No specific earnings guidance was provided. Management stated it believed available cash sources would meet near-term working-capital and long-term capital needs and support quarterly distributions, while noting that distributions are discretionary.
Important facts for investors to verify
- Whether the Ethylene Sales Agreement’s purchase commitments and cost-plus pricing continue to support cash generation as market prices and production volumes change.
- Current project spending, remaining funding needs, and schedule for the Petro 1 expansion, including the extent of financing available from Westlake.
- Debt balances, revolver covenant compliance, interest-rate exposure, and the effect of any restrictions on OpCo distributions.
- Progress and potential cost exposure from the EPA, CERCLA, PolyOne, and Louisiana environmental matters, including the scope of Westlake indemnities.
- Distribution coverage and the distinction between consolidated OpCo results and earnings and cash flow attributable to the Partnership’s 13.3% interest.