Westlake Chemical Partners LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. The Partnership owns a 22.8% limited partner interest in OpCo and controls it through OpCo’s general partner; Westlake owns the remaining 77.2%. OpCo operates three ethylene production facilities and an ethylene pipeline. Results are consolidated, with Westlake’s share presented as noncontrolling interest.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $268.2 million | $250.5 million | +7.1% |
| Gross profit / margin | $87.7 million / 32.7% | $103.5 million / 41.3% | Profit and margin declined |
| Operating income | $79.0 million | $97.4 million | Down $18.3 million |
| Net income | $76.6 million | $93.8 million | Down $17.1 million |
| Net income attributable to Partnership | $15.1 million | $17.7 million | Down $2.6 million |
| Net income per common unit | $0.43 | $0.50 | Down $0.07 |
| MLP distributable cash flow | $16.2 million | $18.3 million | Down $2.1 million |
| EBITDA | $106.6 million | $124.0 million | Down $17.4 million |
| Operating cash flow | $155.4 million | $111.0 million | Up $44.4 million |
Sales prices rose 22.2%, while sales volume fell 19.0%, primarily because of the severe winter storm’s impact on production. Higher feedstock and conversion costs and lower third-party volumes reduced gross margin. SG&A rose 40.3% to $8.7 million, mainly from higher service costs. Interest expense fell to $2.2 million from $4.0 million, largely due to a lower average interest rate.
Cash, debt, and distributions
- Cash and cash equivalents were $17.3 million at quarter-end. The Partnership also reported $187.2 million receivable under its Investment Management Agreement with Westlake, compared with $123.2 million at year-end.
- Long-term debt payable to Westlake was unchanged at $399.7 million: $22.6 million under the OpCo revolver and $377.1 million under the MLP revolver. The weighted-average rate was 2.2%; all debt was variable-rate and covenants were met.
- Operating activities generated $155.4 million. Investing activities used $76.6 million, including $64.0 million invested with Westlake and $12.7 million of capital expenditures. Financing activities used $78.7 million, principally distributions.
- Quarterly cash distribution was $0.4714 per unit, unchanged from Q1 2020; the May 2021 declaration was payable May 27. The related distribution to unitholders was $16.6 million, exceeding Q1 Partnership-attributable net income of $15.1 million; MLP distributable cash flow was $16.2 million. Distributions are not contractually guaranteed.
Material changes, unusual items, and outlook
- The February 2021 winter storm disrupted OpCo facilities, causing lost production, additional maintenance costs, and force majeure declarations. Facilities had resumed production by the filing date. The Partnership recognized a $5.5 million buyer deficiency fee and $4.2 million production-cost shortfall in Q1; both were scheduled to be received after year-end 2021.
- Q1 2021 sales included these storm-related amounts. For comparison, the Partnership received in January 2021 a $69.6 million buyer deficiency fee recognized in 2020 for hurricane-related force majeure events.
- Operating cash flow benefited from working capital, including collection of the prior-year storm deficiency fee; working capital provided $51.5 million in Q1 2021 versus using $8.7 million in Q1 2020.
- Management said it expects cash from operations, revolvers, and other potential sources to meet near- and long-term requirements and support distributions, but Westlake is not obligated to provide additional financing. The Partnership expects the deferred Petro 2 turnaround to take place in the second half of 2021 and last about 60 days.
- Management reported no significant business disruption from COVID-19 to date and did not expect significant disruption, while noting that the pandemic’s eventual financial effects remain uncertain. No specific earnings guidance was provided.
- Key risks include production outages and weather events, commodity and feedstock price volatility, customer concentration (Westlake represented about 82% of Q1 sales), variable-rate debt and LIBOR transition, and environmental regulation. A potential EPA flare matter may require a monetary sanction exceeding $300,000; Westlake is expected to indemnify the Partnership. The Partnership stated that it did not believe the matter or other legal proceedings would materially adversely affect it.
Important investor verification points
- Confirm actual 2021 production, storm-related costs, and receipt of the $9.7 million of Q1 deficiency and shortfall revenue expected after year-end.
- Assess distribution sustainability against attributable earnings and distributable cash flow, including turnaround reserve requirements and planned Petro 2 maintenance.
- Review the Partnership’s substantial reliance on Westlake for sales, cash investment, financing, services, and indemnification, including the collectability and availability terms of the $187.2 million investment-management receivable.
- Monitor variable-rate debt, revolver maturities and covenant headroom, and the transition from LIBOR to an alternate benchmark. Management estimated a 100-basis-point rate increase would add about $4.0 million to annual interest expense.
- Track the EPA flare proceeding and confirm the scope and enforceability of Westlake’s expected indemnification.