Westlake Chemical Partners LP — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars, millions unless noted.
Business context
The Partnership operates through OpCo, which owns three ethylene production facilities and a common-carrier pipeline. Its principal revenue source is a long-term, cost-plus ethylene sales agreement with Westlake Chemical Corporation. The Partnership owns 22.8% of OpCo and consolidates OpCo; Westlake owns the remaining 77.2%. Westlake accounted for 86.7% of Q3 sales and 85.9% of nine-month sales.
In March 2019, the Partnership issued 2.94 million common units for net proceeds of approximately $62.7 million and acquired an additional 4.5% interest in OpCo.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $249.9 | $363.7 | $819.1 | $949.9 |
| Gross profit | $93.2 | $93.9 | $275.8 | $283.5 |
| Income from operations | $86.4 | $88.0 | $254.4 | $263.1 |
| Consolidated net income | $82.5 | $83.8 | $241.0 | $249.0 |
| Net income attributable to the Partnership | $14.9 | $12.4 | $43.6 | $37.5 |
| Net income per common unit | $0.42 | $0.38 | $1.27 | $1.14 |
| MLP distributable cash flow (non-GAAP) | $20.5 | $15.0 | $54.4 | $45.5 |
| EBITDA (non-GAAP) | $113.6 | $115.6 | $337.3 | $347.0 |
Gross margin was approximately 37.3% in Q3 2019 versus 25.8% a year earlier, and 33.7% for 9M 2019 versus 29.8%. The improvement in percentage margin occurred despite lower sales; gross profit declined slightly in both comparisons. Q3 sales fell 31.3%, primarily reflecting lower prices to Westlake under the sales agreement; reported overall sales volumes were comparable. For nine months, sales fell 13.8%, with overall sales volumes also comparable.
Q3 Partnership-attributable income and distributable cash flow increased, primarily due to the higher OpCo ownership share, with higher third-party sales volume and margins also supporting quarterly distributable cash flow. Nine-month Partnership-attributable income increased despite lower consolidated net income, mainly because of the increased OpCo interest and higher ethylene sales margins. Nine-month EBITDA declined, primarily from weaker third-party prices and derivative losses, partly offset by higher third-party volumes and lower feedstock costs.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $335.2 million, up from $330.0 million. Investing cash outflow was $46.0 million, including $30.0 million of capital expenditures; financing cash outflow was $290.3 million. Cash at September 30 was $18.6 million.
- The Partnership reported $164.9 million receivable under its Investment Management Agreement with Westlake. The arrangement provides for daily availability of invested funds and earns a market return plus five basis points.
- Debt payable to Westlake was $399.7 million, all variable-rate: $22.6 million under the OpCo Revolver and $377.1 million under the MLP Revolver. The weighted-average rate was 4.3%; the Partnership reported compliance with debt covenants.
- Debt declined from $477.6 million at year-end 2018. The Partnership repaid $201.4 million under the OpCo Revolver and borrowed $123.5 million under the MLP Revolver during the nine-month period.
- Quarterly distributions declared for Q3 earnings were $0.4579 per unit. On October 31, the general partner declared a subsequent quarterly distribution of $0.4646 per unit, payable November 26, 2019. Q3 declared unitholder distributions exceeded Partnership-attributable income by approximately $1.4 million.
Outlook, risks and unusual items
- Management stated it expected available liquidity and financing sources to meet short- and long-term needs and distributions; it did not provide specific earnings guidance. It believed the March unit placement meant no further equity-market access would be needed during the remainder of 2019. Distributions are not contractually guaranteed.
- Most revenue is tied to Westlake under a minimum-purchase, cost-plus agreement, but the customer concentration creates significant reliance on Westlake. The agreement’s minimum commitment is generally 95% of budgeted production, subject to specified force-majeure provisions.
- Commodity derivatives produced losses recognized in sales and cost of sales. For the nine months, derivative losses were $4.4 million in net sales and $2.7 million in cost of sales; Q3 losses were $6.8 million and $1.3 million, respectively. These positions can limit gains from favorable commodity-price movements and involve counterparty risk.
- All outstanding debt was variable-rate. Management estimated that a 100-basis-point rate increase would add about $4.0 million to annual interest expense. LIBOR phase-out was under review; management did not expect a material impact.
- The filing describes an EPA enforcement matter involving alleged flare compliance issues at Calvert City and Lake Charles. The Partnership said resolution may require a monetary sanction in excess of $100,000; the timing and final amount are not specified. Westlake indemnifies the Partnership for certain pre-August 4, 2014 liabilities. Other legal proceedings were not expected to materially affect results.
- Environmental regulation, operating interruptions, raw-material and energy costs, chemical-industry cyclicality, market pricing, access to capital and customer creditworthiness are among the disclosed risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Westlake’s purchase commitments and cost-plus pricing continue to support operating margins amid lower ethylene and feedstock prices.
- Cash availability and counterparty exposure associated with the $164.9 million Investment Management Agreement balance, alongside reliance on Westlake for sales and financing.
- Debt levels, variable-rate exposure, covenant compliance and the Partnership’s capacity to fund distributions and capital needs.
- The outcome, cost and potential indemnification of the EPA flare matter, including any required corrective actions.
- Whether distributable cash flow continues to cover distributions, particularly as Q3 declared distributions exceeded Partnership-attributable net income.