Westlake Chemical Partners LP — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The financial statements are unaudited carve-out statements of the Predecessor, Westlake’s historical ethylene business—not post-IPO results of the Partnership. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and IPO
The Partnership was formed in March 2014. On August 4, 2014, after the reporting period, it completed an IPO and acquired a 10.6% limited partner interest in OpCo and 100% of OpCo’s general partner. OpCo owns three ethylene production facilities with approximately 3.4 billion pounds of annual capacity and a 200-mile pipeline. Westlake retained an 89.4% interest in OpCo and significant interests in the Partnership. The historical Predecessor included operations, assets and activities that were not all contributed to OpCo; consequently, post-IPO results are not directly comparable.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $524.1 | $524.8 | $1,084.1 | $1,025.7 |
| Gross profit | $246.5 | $238.2 | $478.9 | $428.2 |
| Gross margin | 47.0% | 45.4% | 44.2% | 41.7% |
| Operating income | $240.4 | $231.4 | $464.9 | $415.2 |
| Net income | $153.8 | $149.0 | $297.7 | $269.8 |
| Interest expense to Westlake | $4.1 | $1.6 | $7.7 | $2.6 |
Q2 sales were essentially flat year over year, while net income rose about 3%. For the first half, sales increased 5.7% and net income increased about 10%. Higher sales volumes contributed to first-half growth. Improved product margins, including lower reliance on more expensive propane after the Calvert City feedstock conversion, supported profitability. Turnaround, conversion and expansion costs and lost production partly offset those benefits. First-half interest expense increased primarily because of higher average related-party debt.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $378.9, versus $251.1 in 2013; management attributed the increase mainly to improved operating income and lower working-capital cash use.
- Investing cash outflow was $106.5, including $106.2 of capital expenditures, primarily for Calvert City conversion and expansion and planned Petro 1 upgrades.
- Financing cash outflow was $272.4, reflecting $376.6 of net distributions to Westlake, partly offset by $104.2 of promissory-note proceeds. The Predecessor reported no cash because funds were swept through Westlake’s centralized cash-management system.
- At June 30, total assets were $1,075.0, current assets $163.1 and current liabilities $143.3. Long-term debt payable to Westlake was $364.6, up from $253.0 at December 31, 2013; net investment was $376.5.
- After the IPO, OpCo assumed $246.1 of August 2013 promissory notes and entered a $600.0 million intercompany credit facility with Westlake. The filing describes variable-rate borrowing; it does not present post-IPO consolidated liquidity results for the quarter.
Outlook, material agreements and risks
- The 12-year Ethylene Sales Agreement requires Westlake to purchase at least 95% of OpCo’s planned annual production, subject to exceptions and a 3.8 billion-pound cap. Pricing is designed to cover specified feedstock and operating costs, maintenance and turnaround costs, less co-product proceeds, plus a $0.10-per-pound margin. Management expects the arrangement to support more predictable cash flows; this is not a guarantee of results.
- The Partnership intends to pay a minimum quarterly distribution of $0.275 per unit, approximately $7.4 million per quarter based on post-IPO units, but has no legal or contractual obligation to pay that amount or to distribute quarterly.
- Management estimated 2014 capital expenditures of approximately $171.2 million, of which $106.2 million had been spent in the first half. A planned Petro 1 upgrade and expansion, targeted for late 2015 to early 2016, was estimated to cost $250–$310 million and add about 250 million pounds of annual capacity. Westlake was expected to fund future expansion borrowing, but was not obligated to do so.
- The IPO proceeds funded an initial $55.4 million turnaround reserve; management intended to reserve approximately $29.3 million annually thereafter. The Partnership also expected about $3.0 million of incremental annual public-company general and administrative expense.
- Westlake represented approximately 79.2% of Predecessor sales in Q2 2014 and 73.7% in the first half. This concentration, related-party feedstock and services arrangements, and dependence on Westlake’s ability to purchase output are important risks. The filing states that historical related-party prices may differ from third-party prices.
- The Predecessor had $364.6 million of variable-rate debt at June 30; a hypothetical 100-basis-point rate increase was estimated to raise annual interest expense by about $1.9 million. Commodity prices, production volumes, plant reliability, maintenance and turnaround execution, and demand for ethylene and co-products also affect results.
- Environmental proceedings concerning historical contamination at Calvert City remained unresolved, and the Predecessor could not estimate any potential loss. Westlake agreed to indemnify OpCo for specified pre-existing contamination liabilities. Management did not expect routine legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- How post-IPO reported results compare with these carve-out results, given the assets and activities retained by Westlake and the new cost-plus sales arrangement.
- Whether Westlake fulfills its minimum purchase commitment and whether OpCo’s actual production, costs and co-product revenues support the expected margin and cash distributions.
- Actual post-IPO debt, interest expense, capital spending and cash available for distributions, including reliance on the Westlake credit facility.
- Execution, cost and schedule of planned turnarounds and the Petro 1 expansion, as well as the adequacy of turnaround reserves.
- Developments in the Calvert City contamination matters, including any allocation of remediation costs and the scope and application of Westlake’s indemnity.