Westlake Chemical Partners LP — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; filed August 4, 2021. Westlake Chemical Partners LP owns a 22.8% limited partner interest in Westlake Chemical OpCo LP (OpCo) and controls it through its general-partner interest. The consolidated statements include OpCo’s results, with Westlake’s 77.2% interest shown as noncontrolling interest. The business operates ethylene facilities and a pipeline; most ethylene is sold to Westlake under a long-term, fee-based agreement.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $322.2 million | $238.5 million | $590.4 million | $489.0 million |
| Gross profit / margin | $131.0 million / 40.7% | $90.0 million / 37.7% | $218.7 million / 37.0% | $193.6 million / 39.6% |
| Income from operations | $122.8 million | $83.9 million | $201.8 million | $181.2 million |
| Consolidated net income | $120.3 million | $80.4 million | $196.9 million | $174.1 million |
| Net income attributable to Partnership | $25.1 million | $14.9 million | $40.2 million | $32.6 million |
| MLP distributable cash flow (non-GAAP) | $25.5 million | $16.9 million | $41.8 million | $35.2 million |
| EBITDA (non-GAAP) | $151.5 million | $109.8 million | $258.1 million | $233.8 million |
Cash, debt and distributions
- For the first six months, operating cash flow was $287.1 million, investing cash flow was negative $126.2 million and financing cash flow was negative $160.4 million. Cash increased $0.5 million to $17.7 million.
- Capital expenditures were $27.3 million for the six months. The Partnership had $222.2 million invested with Westlake under an agreement that provides daily availability of funds and a market return plus five basis points.
- Debt payable to Westlake was $399.7 million, unchanged from year-end 2020: $377.1 million under the MLP Revolver and $22.6 million under the OpCo Revolver. Both bore variable-rate LIBOR plus 2.0%; the weighted-average rate was 2.2%. The Partnership reported covenant compliance.
- On August 2, 2021, the general partner declared a $0.4714-per-unit quarterly distribution, payable August 26. The quarterly rate matched 2020; the filing states distributions are not contractually required.
Material changes and drivers
- Q2 sales rose 35.1% year over year; six-month sales rose 20.7%. Management attributed the increases chiefly to higher product prices and higher third-party sales, as well as fees recognized under the Westlake sales agreement. Q2 average sales price increased 30.5%; six-month average sales price increased 25.4%. Six-month sales volume declined 8.4%, mainly due to force majeure events.
- Q2 Partnership-attributable net income increased $10.2 million year over year; six-month attributable income increased $7.6 million. Higher prices, third-party volumes and deficiency/shortfall fees contributed, partly offset by higher ethane feedstock and natural gas costs. Six-month gross margin declined despite higher gross profit, reflecting increased feedstock and natural gas costs.
- Interest expense declined to $2.2 million in Q2 and $4.5 million for six months, from $3.4 million and $7.4 million, respectively, primarily due to lower average interest rates.
- Third-party co-product, ethylene and other sales were $81.3 million in Q2 versus $11.1 million a year earlier. Westlake represented 74.8% of Q2 sales and 78.0% of six-month sales, versus 95.4% and 90.4%, respectively, in the prior-year periods.
Outlook, risks and unusual items
- OpCo’s Petro 1 facility had an outage in June, and a severe winter storm led to a February force majeure. The Partnership recognized buyer deficiency and shortfall fees of $8.7 million in Q2 and $18.4 million for the six months. These are included in sales; six-month fees were scheduled to be received after year-end. The 2021 production estimate and related fee estimate may change.
- Management said it had not experienced significant COVID-19 operating disruption and did not expect significant disruption, but noted the pandemic’s future financial effects could not be estimated with certainty. The filing provides no specific earnings or production guidance.
- Commodity exposure is stated to be limited primarily to approximately 5% of ethylene production sold to third parties; the Westlake agreement includes minimum purchase commitments and cost-based pricing. No derivative positions were open at June 30.
- All outstanding debt is variable rate and owed to Westlake affiliates. A 100-basis-point increase in the average rate would add approximately $4.0 million to annual interest expense based on period-end debt. The filing notes LIBOR phase-out and says no material impact is expected.
- The EPA has pursued potential flare-related corrective actions at facilities. The Partnership believes resolution may require a monetary sanction exceeding $300,000 and expects Westlake to fully indemnify it. It also disclosed environmental and other legal proceedings, which it does not believe will materially adversely affect its financial condition, results or cash flows.
- Management believes available cash and financing sources should meet working-capital, capital-expenditure and distribution needs, but Westlake is not obligated to provide additional financing. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the Petro 1 outage and winter-storm impacts affect annual production, sales volumes and future deficiency or shortfall fee estimates, and when the recognized fees are collected.
- The sustainability of distributions relative to Partnership-attributable cash generation, turnaround reserves, maintenance spending and capital needs; MLP distributable cash flow is a non-GAAP measure and excludes working-capital changes.
- Westlake counterparty and related-party exposure, including the large Westlake receivable/investment balances, Westlake’s share of sales and the Westlake-funded debt.
- Variable-rate debt costs, revolver maturities and the transition from LIBOR to an alternate benchmark.
- Progress and potential cost of the EPA flare matter, including whether the expected Westlake indemnification covers all Partnership liabilities.