Westlake Chemical Partners LP — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. The partnership owns a 22.8% limited partner interest in Westlake Chemical OpCo LP (OpCo) and controls OpCo through its general partner. Westlake owns the remaining 77.2%. OpCo operates ethylene facilities and a pipeline. Westlake is the principal customer and a related-party lender and service provider.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $448.8 million | $322.2 million | $811.2 million | $590.4 million |
| Gross profit / margin | $97.3 million / 21.7% | $131.0 million / 40.7% | $188.7 million / 23.3% | $218.7 million / 37.0% |
| Operating income | $87.4 million | $122.8 million | $170.6 million | $201.8 million |
| Consolidated net income | $84.4 million | $120.3 million | $165.3 million | $196.9 million |
| Net income attributable to the partnership | $16.4 million | $25.1 million | $32.6 million | $40.2 million |
| MLP distributable cash flow | $19.6 million | $25.5 million | $38.9 million | $41.8 million |
| EBITDA | $118.5 million | $151.5 million | $233.0 million | $258.1 million |
Cash flow: First-half operating cash flow was $225.7 million, down from $287.1 million. Investing activities used $55.3 million, including $32.3 million of capital expenditures; financing activities used $169.0 million, principally distributions. Cash was $18.4 million at June 30, and $129.4 million was invested with Westlake under the Investment Management Agreement.
Debt and liquidity: Debt payable to Westlake totaled $399.7 million, unchanged from year-end, comprising $22.6 million under the OpCo revolver and $377.1 million under the MLP revolver. The weighted average interest rate was 3.0%, versus 2.1% at December 31, 2021; all debt was variable-rate. Current assets were $301.6 million and current liabilities $92.0 million. The partnership reported compliance with debt covenants at June 30. On July 12, both revolvers were amended to replace LIBOR with SOFR and extend maturity to July 12, 2027.
Distribution: The quarterly distribution remained $0.4714 per unit. The August 1 declaration was payable August 25 to unitholders of record August 11. Second-quarter and first-half partnership-attributable net income fell short of declared common-unit distributions by $0.2 million and $0.6 million, respectively.
Material changes and management commentary
Sales rose 39.3% in Q2 and 37.4% in the first half, chiefly from higher sales prices and volumes to Westlake under the cost-based Ethylene Sales Agreement and higher co-product sales. The average sales price contributed to sales growth of 37.7% in Q2 and 30.3% in the first half; volume contributed 5.5% and 11.5%, respectively.
Despite higher sales, gross profit and earnings declined. Management cited increased ethane feedstock and natural gas costs, lower third-party ethylene prices and volumes, and prior-year buyer deficiency and Shortfall fees. Those prior-year fees totaled $8.7 million in Q2 and $18.4 million in the first half. Partnership-attributable net income per unit was $0.47 in Q2 versus $0.71, and $0.93 for the first half versus $1.14.
First-half operating cash flow declined by $61.4 million. Management attributed the working-capital comparison partly to payment timing for Petro 2 turnaround accruals, higher third-party receivables following the 2021 turnaround, and collection of prior-year Westlake deficiency and Shortfall amounts. Capital expenditures were $32.3 million versus $27.3 million a year earlier.
Outlook, risks and unusual items
The filing provides no quantified earnings or production guidance. Management said cash from operations, the revolvers and other potential financing sources are expected to cover short- and long-term needs and quarterly distributions, while noting distributions are not legally or contractually guaranteed. Westlake is not obligated to provide future financing or loans. Westlake purchases at least 95% of budgeted annual ethylene production under the fee-based sales agreement; pricing includes feedstock and other costs plus a fixed margin, but third-party sales remain more exposed to commodity prices.
Concentration and related-party risks are significant: Westlake accounted for 81.4% of Q2 and 80.8% of first-half sales. At June 30, the partnership also had $129.4 million invested with Westlake and $399.7 million of debt owed to Westlake affiliates. A 100-basis-point increase in variable interest rates was estimated to add about $4.0 million to annual interest expense based on period-end debt.
A June 2022 agreement in principle on an EPA flare matter contemplated a consent decree requiring equipment, monitoring and controls, and a $1 million penalty; estimated implementation costs were approximately $110 million, with costs incurred or expected over 2021–2023. Westlake is expected to fully indemnify the partnership, but the decree was not yet effective pending completion of state comment processes and court entry. Lawsuits arising from the September 2021 Petro 2 flash fire remain pending; the partnership expects insurance to cover most costs. The filing says other legal proceedings are not expected to have a material adverse effect. Management reported no material changes to the prior Form 10-K risk factors and no material changes in internal control over financial reporting.
Other risks identified include chemical-industry cyclicality, raw-material and energy price volatility, operating interruptions, environmental regulation, supply-chain and workforce constraints, customer creditworthiness, and effects of the Russia-Ukraine conflict and public-health events. The partnership had no open derivative positions at June 30.
Important facts for investors to verify
- Whether the flare consent decree becomes effective as described, how the approximately $110 million of compliance costs are allocated, and whether Westlake indemnification is realized.
- Whether earnings and distributable cash flow can support the $0.4714 quarterly distribution, given first-half distributions exceeded partnership-attributable net income.
- Future feedstock and natural-gas costs, third-party ethylene prices and volumes, and the timing and impact of turnaround and maintenance spending.
- Westlake’s ability and willingness to meet purchase, payment, indemnification and potential financing obligations, given the partnership’s customer and funding concentration.
- Variable-rate debt exposure, covenant headroom and the financial effects of the July 2022 revolver amendments.
- Developments in Petro 2 flash-fire litigation and the extent of insurance coverage.