Business context and reporting period
Westlake Chemical Partners LP filed its first Form 10-K for the year ended December 31, 2014. The Partnership completed its IPO on August 4, 2014. It owns a 10.6% limited partner interest in Westlake Chemical OpCo LP and controls OpCo through its ownership of the general partner; Westlake retains the other 89.4% of OpCo and a 52.2% interest in the Partnership. The filing consolidates OpCo, with Westlake’s retained interest presented as noncontrolling interest.
OpCo operates three ethylene plants with combined annual capacity of approximately 3.37 billion pounds and a 200-mile ethylene pipeline. A 12-year agreement requires Westlake to purchase 95% of planned ethylene production, subject to exceptions and a 3.8-billion-pound annual cap, at a cost-based price designed to provide a $0.10-per-pound margin.
Financial results and liquidity
Amounts below are in millions of dollars unless stated otherwise. Full-year 2014 results combine the Predecessor’s results before the IPO with the Partnership’s consolidated results after the IPO; they are not directly comparable to a full year of post-IPO Partnership results.
| Metric | 2014 | 2013 | Change/comment |
|---|---|---|---|
| Net sales | $1,749.7 | $2,127.7 | Down 17.8% |
| Gross profit | $745.8 | $872.6 | Gross margin 42.6%, up from 41.0% |
| Income from operations | $716.6 | $847.2 | Down 15.4% |
| Net income | $509.8 | $546.5 | Down 6.7% |
| Interest expense | $10.5 | $8.0 | Higher average debt balance |
| Operating cash flow | $604.0 | $602.5 | Combined/Predecessor and Partnership basis |
| Capital expenditures | $202.8 | $223.1 | Primarily plant expansion and conversion projects |
| EBITDA | $797.3 | $928.3 | Non-GAAP; combined reporting basis |
Fourth-quarter 2014 net sales were $273.5 million, gross profit $102.0 million, operating income $95.5 million and net income $93.9 million. Compared with fourth-quarter 2013, sales declined from $561.9 million, gross profit from $231.5 million, operating income from $225.3 million and net income from $144.2 million. The filing cautions that post-IPO operating results differ in scope and pricing from the Predecessor’s results.
At December 31, 2014, cash was $133.8 million, working capital $164.7 million, total assets $1.10 billion and total debt $227.6 million. Debt comprised $167.1 million of Westlake promissory notes and $60.5 million drawn on a $600 million Westlake revolving facility. The debt is variable-rate and owed to Westlake; the reported weighted-average rate was 4.35%. The Partnership reported compliance with debt covenants and no debt maturities until 2019.
Partnership-attributable net income after the IPO was $13.6 million, or $0.50 per common and subordinated unit. MLP distributable cash flow, a non-GAAP measure for the post-IPO Partnership and excluding Westlake’s noncontrolling interest, was $13.8 million for 2014. The Partnership paid an initial prorated distribution of $0.1704 per unit; a subsequent $0.2750-per-unit distribution for the fourth quarter was declared in January 2015 and paid in February.
Material changes versus prior periods
- Sales fell mainly because of lower average sales prices and volumes of ethylene sold to Westlake under the new cost-plus agreement, and because Westlake retained the Predecessor’s ethylene procurement and resale activities after the IPO.
- Lower feedstock costs, particularly following Calvert City’s conversion from propane to ethane, helped raise the annual gross margin percentage. This was partly offset by lower ethylene margins under the new agreement and Calvert City turnaround, conversion and expansion downtime and costs.
- Average sales prices decreased 10.5% and total sales volumes decreased 7.3% in 2014 versus 2013, according to the filing.
- Post-IPO, the Partnership no longer bears the Predecessor’s federal income tax at the entity level; the reported full-year tax expense includes the Predecessor period and is not a like-for-like measure.
Outlook, risks and unusual items
- Management planned a Petro 1 upgrade and expansion for the first half of 2016, estimated at $275 million to $335 million and expected to add approximately 250 million pounds of annual capacity. The filing says Westlake may lend funds for the project but is not obligated to do so.
- Management expected crude-oil price declines beginning in late 2014 to contribute to market volatility and potentially lower prices and margins on third-party ethylene and coproduct sales in 2015. More than 26% of post-IPO revenue through year-end came from third-party ethylene and coproduct sales.
- Cash generation is highly dependent on Westlake: it accounted for approximately 73.8% of 2014 net sales, and OpCo’s minimum-purchase revenue and feedstock supply are governed by related-party agreements. Westlake’s ability to pay, operational interruptions, turnarounds, and the agreement’s exceptions to purchase commitments could affect distributions.
- Environmental matters include EPA scrutiny of flares at Lake Charles and Calvert City, Louisiana air-compliance notices, and ongoing Calvert City contamination investigations and proceedings. Potential corrective actions and costs are uncertain; Westlake indemnifies the Partnership for specified liabilities existing before August 4, 2014.
- The Partnership targets a minimum quarterly distribution of $0.2750 per unit when cash is available, but its partnership agreement does not require distributions and the board may change its policy. Westlake controls the general partner and holds incentive distribution rights; the filing highlights related-party and governance conflicts.
- OpCo’s facilities and sites depend on Westlake-provided services, seconded employees and long-term site leases. The sales and feedstock agreements have initial terms through December 31, 2026; the two site leases have 50-year terms.
Most important facts for investors to verify
- Separate Predecessor and post-IPO results before drawing year-over-year conclusions; full-year sales, earnings and operating cash flow do not represent a full year of standalone Partnership operations.
- Confirm the financial bridge from consolidated OpCo results to cash distributions and earnings attributable to the Partnership’s 10.6% OpCo interest, including the $13.8 million distributable cash flow figure.
- Review Westlake’s creditworthiness, the purchase agreement’s minimum-volume terms and exceptions, and the effect of related-party debt, services charges and distribution restrictions.
- Track Petro 1 project cost, financing, schedule and expected downtime, as well as the planned 2015–2016 environmental capital expenditures of approximately $4.9 million and $3.6 million, respectively.
- Monitor EPA and state environmental proceedings, including potential flare modifications and Calvert City remediation exposure, and assess the scope and collectability of Westlake indemnities.
- Assess the sustainability of distributions against OpCo cash generation, turnaround reserves, capital spending and variable-rate debt costs; distributions are not guaranteed.