Business context and reporting period
Westlake Chemical Partners LP’s Form 10-K covers the fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. The Partnership owns an 18.3% limited partner interest in Westlake Chemical OpCo LP (OpCo) and controls OpCo through its general partner. Because it consolidates OpCo, reported consolidated results include OpCo’s operations, while Westlake retains an 81.7% noncontrolling interest.
OpCo owns three ethylene plants with combined annual capacity of approximately 3.72 billion pounds and a 200-mile ethylene pipeline. Westlake is the principal customer and feedstock supplier. Its 12-year sales agreement, through 2026, generally commits it to buy 95% of planned ethylene production at a cost-based price designed to include a $0.10-per-pound margin.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,285.6 million | $1,173.0 million |
| Gross profit / gross margin | $377.2 million / 29.3% | $403.7 million / 34.4% |
| Income from operations | $349.6 million | $374.4 million |
| Consolidated net income | $330.6 million | $353.1 million |
| Net income attributable to the Partnership and limited partners | $49.3 million | $48.7 million |
| Basic and diluted earnings per common unit | $1.51 | $1.72 |
| Net cash from operating activities | $436.2 million | $537.4 million |
| Capital expenditures | $39.9 million | $68.9 million |
| MLP distributable cash flow (non-GAAP) | $60.0 million | $54.7 million |
| EBITDA (non-GAAP) | $460.9 million | $490.2 million |
Westlake generated 83.6% of 2018 net sales. Third-party sales of ethylene and co-products were $210.7 million. The Partnership reported 2018 distributions of $1.6134 per common unit in the financial-statement note; the selected-data section presents $1.66, so investors should verify the applicable distribution measure and period.
At December 31, 2018, cash and cash equivalents were $19.7 million, cash invested with Westlake under the Investment Management Agreement was $149.0 million, and working capital was $198.4 million. Total debt was $477.6 million, all payable to Westlake: $224.1 million under OpCo’s revolver and $253.5 million under the Partnership’s revolver. The weighted-average debt interest rate was 4.40%; both facilities bear variable rates. The filing reports compliance with debt covenants.
For the three months ended December 31, 2018, net sales were $335.7 million, gross profit $93.6 million, operating income $86.5 million, consolidated net income $81.6 million, and net income attributable to the Partnership $11.9 million, or $0.37 per common unit. Fourth-quarter 2017 comparatives were $308.6 million, $110.7 million, $103.0 million, $98.3 million, and $15.5 million, or $0.46 per common unit, respectively.
Material changes versus the prior comparable period
- Annual net sales rose 9.6%, reflecting higher sales volumes, higher prices to Westlake under the sales-agreement formula, and increased pipeline-services fees; lower third-party ethylene prices partly offset the increase.
- Gross profit fell $26.5 million and gross margin declined to 29.3% from 34.4%, primarily because of lower third-party ethylene sales prices and higher feedstock costs.
- Consolidated net income declined $22.5 million. Partnership-attributable income increased $0.7 million, supported by its increased OpCo ownership stake, higher production, and lower maintenance capital expenditures, partly offset by weaker third-party margins.
- Operating cash flow decreased $101.2 million, mainly due to lower operating income and less favorable working-capital movements. Cash used for investing fell to $51.8 million, principally as capital spending declined; financing cash outflows were $391.6 million, primarily distributions.
- Debt increased modestly to $477.6 million from $474.0 million. OpCo’s revolver maturity was extended to September 2023 and its margin reduced from 3% to 2%. The interest-rate hedge on part of the Partnership revolver expired in August 2018.
Outlook, risks, contingencies and unusual items
- The filing provides no quantitative earnings or production guidance. Management states that available liquidity is expected to meet short- and long-term needs and support quarterly distributions, but distributions are discretionary and not contractually guaranteed. A $0.4328-per-unit distribution for the fourth quarter was declared in January 2019 and paid in February.
- OpCo expects environmental-compliance capital expenditures of approximately $3.8 million in 2019 and $2.2 million in 2020, compared with $1.0 million in 2018. Management cites increased spending associated with EPA regulations.
- In November 2018, the ethylene sales agreement was amended to let OpCo curtail up to approximately 5% of annual production if third-party sales would be uneconomic. An at-the-market program permits up to $50 million of unit sales; no units were issued under it in 2018.
- Key risks include reliance on Westlake for most revenue, cash distributions and services; Westlake’s creditworthiness; variable-rate debt; plant outages, turnarounds and safety incidents; cyclical chemical markets; and environmental regulation. The agreements supporting the business generally have initial terms through December 31, 2026.
- Environmental matters include an EPA flare-enforcement inquiry, for which the EPA sought corrective actions and the Partnership estimated a possible monetary sanction exceeding $100,000, and a separate Risk Management Program matter with an agreement in principle for a $49,000 penalty and a $184,000 supplemental environmental project. Settlement documents were still being finalized. Management did not expect pending proceedings to have a material adverse effect.
- Westlake-related transactions are significant: Westlake supplies feedstock and services, receives most sales, holds the Partnership’s general partner and incentive distribution rights, and is owed all reported debt. The Partnership reimbursed Westlake and affiliates approximately $164 million for expenses in 2018.
- PwC issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether Westlake can continue to meet its purchase, feedstock-supply, service and financing obligations, and the effect of this concentration on distributions.
- The precise distribution-per-unit figure and coverage measure: the filing reports $1.6134 in its distribution note and $1.66 in selected financial data, while MLP distributable cash flow is a non-GAAP measure.
- Current revolver balances, covenant headroom, variable-rate exposure, and the availability and terms of cash invested with Westlake.
- Progress and potential costs of the EPA matters, flare corrective actions, and forecast environmental capital spending.
- Actual 2019 capital needs, turnaround timing, plant reliability, and performance of third-party ethylene sales following the curtailment amendment.