Business context and reporting period
Westlake Chemical Partners LP’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. The Partnership consolidates Westlake Chemical OpCo LP (OpCo), which owns three ethylene production facilities and a pipeline; Westlake owns 81.7% of OpCo and the Partnership owns 18.3%. Revenue is generated mainly under a long-term, cost-based ethylene sales agreement with Westlake. Westlake accounted for 87.0% of third-quarter sales and 82.4% of nine-month sales.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $296.8 million | $229.4 million | $864.3 million | $692.8 million |
| Gross profit | $95.4 million | $86.8 million | $292.9 million | $285.6 million |
| Gross margin | 32.1% | 37.8% | 33.9% | 41.2% |
| Income from operations | $88.6 million | $81.0 million | $271.4 million | $267.9 million |
| Net income, consolidated | $82.2 million | $75.9 million | $254.7 million | $259.8 million |
| Net income attributable to Partnership | $13.4 million | $8.7 million | $33.1 million | $30.1 million |
| MLP distributable cash flow | $15.5 million | $6.8 million | $37.9 million | $20.6 million |
| EBITDA | $117.8 million | $107.3 million | $359.8 million | $335.6 million |
Third-quarter common-unit earnings were $0.47, versus $0.32 a year earlier. Nine-month common-unit earnings were $1.23 versus $1.11; subordinated-unit earnings were $1.07 in 2017 versus $1.11 in 2016. The per-unit comparisons reflect changes in unit classes and weighted-average units.
For the first nine months, operating cash flow was $401.9 million, investing cash outflow was $173.8 million, and financing cash outflow was $299.8 million. Cash declined to $17.2 million at September 30 from $88.9 million at year-end 2016. A further $119.0 million was invested with Westlake under an agreement providing daily availability and a market return plus five basis points. Property, plant and equipment, net, was $1.206 billion.
Debt payable to Westlake totaled $477.1 million: $223.6 million under the OpCo Revolver and $253.5 million under the MLP Revolver. The weighted-average rate was 3.74%; the filing reports a 4.0% weighted-average variable rate excluding the portion effectively fixed by an interest-rate contract. The Partnership reported compliance with debt covenants. The MLP Revolver’s $300 million facility maturity was extended to April 2021; the $600 million OpCo Revolver is scheduled to mature in 2019.
Material changes versus prior periods
- Q3 sales increased 29.4%; reported sales volume rose 36.9%, while average sales price fell 7.5%. Nine-month sales increased 24.8%, with volume up 28.7% and average sales price down 3.9%.
- Higher production and sales volumes supported results, including increased Lake Charles Petro 1 output after its expansion was completed in July 2016 and higher production at Petro 2 and Calvert City.
- Consolidated net income rose $6.4 million in Q3 but fell $5.1 million for the nine-month period. Prior-year results included production-cost shortfall revenue of approximately $25.2 million in Q3 and $81.7 million in the first nine months of 2016. Higher depreciation and amortization, SG&A, and interest expense also weighed on 2017 margins and earnings.
- The Partnership acquired an additional 5% OpCo interest for approximately $229.2 million, effective July 1, increasing its stake to 18.3%. It funded the purchase with $110.7 million of net proceeds from a September secondary offering and MLP Revolver borrowings.
- Westlake’s 12,686,115 subordinated units converted one-for-one into common units effective August 30. The September offering issued 5,175,000 common units at $22 per unit.
Outlook, risks, contingencies and unusual items
Management expects operating cash, revolving facilities and potential equity or debt issuance to support working capital, capital expenditures and distributions, but Westlake is not obligated to provide future loans. 2017 capital expenditures were expected to total approximately $71.2 million; $56.6 million had been spent through September. The Partnership reserves approximately $30 million annually for turnarounds. The board declared a $0.3756-per-unit quarterly distribution, payable November 29, 2017, plus $498,000 to the incentive distribution rights holder; management notes distributions are not contractually guaranteed.
Management cites chemical-industry cyclicality, feedstock and energy availability and prices, demand and product pricing, operating interruptions, capital-market access, customer creditworthiness, interest rates and environmental regulation as risks. Commodity exposure is described as limited to approximately 5% of ethylene production sold to third parties; the cost-plus agreement and minimum purchase commitment mitigate much of the remaining exposure. A 100-basis-point increase in applicable variable rates would raise annual interest expense by approximately $4.1 million based on period-end debt.
Environmental matters include an EPA flare-enforcement inquiry involving Calvert City and Lake Charles; the EPA has indicated it is seeking a consent decree, and Westlake believes resolution may require a monetary sanction exceeding $100,000. Two Louisiana environmental settlement agreements resolved notices of violation for combined civil penalties of $192,000. The Partnership says other legal proceedings are not expected to materially adversely affect it; Westlake indemnifies certain pre-August 2014 liabilities and specified environmental and other liabilities under the Omnibus Agreement. A $1.7 million insurance recovery related to the 2016 Calvert City shutdown was recognized in 2017 other income.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states no material changes to the risk factors in the 2016 Form 10-K and no off-balance-sheet arrangements.
Important facts for investors to verify
- How the Westlake sales agreement’s cost recovery, minimum purchase commitment and shortfall provisions affect future realized revenue and margins.
- Production, turnaround schedules and capital spending at the three facilities, including expected completion and funding of expansion work.
- Debt balances, variable-rate exposure, covenant compliance and the Partnership’s reliance on Westlake for financing, treasury services and most sales.
- Whether the $0.3756 distribution is sustainable given cash generation, turnaround reserves, investment needs and incentive distribution rights.
- Developments and potential costs from the EPA flare matter and other environmental or legal proceedings.