Westlake Chemical Partners LP — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. The partnership owns a 22.8% limited partner interest in OpCo and consolidates its results; Westlake owns the remaining 77.2% and is also the partnership’s principal customer and lender.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $321.7m | $415.1m | $893.5m | $1,226.3m |
| Gross profit / margin | $93.0m / 28.9% | $90.5m / 21.8% | $286.8m / 32.1% | $279.2m / 22.8% |
| Income from operations | $86.2m | $81.8m | $264.9m | $252.4m |
| Net income | $80.9m | $78.3m | $247.6m | $243.6m |
| Net income attributable to partnership | $13.2m | $14.8m | $40.0m | $47.4m |
| MLP distributable cash flow | $13.6m | $16.7m | $46.2m | $55.6m |
| EBITDA | $115.7m | $111.8m | $349.9m | $344.8m |
- Operating cash flow was $344.3m for the first nine months, versus $341.2m in 2022. Investing activities used $53.1m; financing activities used $290.1m. Cash increased $1.1m to $65.9m.
- At September 30, the partnership also had $84.4m receivable under its Investment Management Agreement with Westlake. Current assets were $231.5m and current liabilities $75.6m.
- Debt payable to Westlake was $399.7m, unchanged from year-end 2022. The weighted-average rate was 7.1%, up from 4.8% at December 31, 2022; all debt is variable rate and matures July 12, 2027. The partnership reported covenant compliance.
Changes and management commentary
- Year-over-year sales fell 22.5% in Q3 and 27.1% for the nine-month period, mainly because of lower ethylene and co-product selling prices. Q3 volumes increased, while nine-month volumes were nearly flat.
- Lower ethane and natural gas costs supported higher gross profit and operating income despite lower sales. Management reported domestic natural gas and ethane prices down 69.4% and 46.0%, respectively, in Q3 year over year.
- Partnership-attributable net income declined, despite higher consolidated operating income, primarily because interest expense rose to $6.4m in Q3 and $19.9m for nine months, compared with $3.6m and $8.7m in the prior-year periods.
- MLP distributable cash flow declined, primarily due to higher interest expense; Q3 was also affected by increased maintenance capital expenditures. Distributions to common unitholders were $49.8m for nine months, exceeding MLP distributable cash flow by approximately $3.7m. Distributable cash flow is a non-GAAP measure and excludes changes in working capital.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said available liquidity sources are expected to cover working capital, capital expenditures and quarterly distributions, but Westlake is not obligated to provide additional financing.
- The quarterly distribution was maintained at $0.4714 per unit; the October 31, 2023 declaration was payable November 27. Distributions are not contractually guaranteed.
- Westlake accounted for 89.9% of Q3 sales and 86.3% of nine-month sales. The long-term Ethylene Sales Agreement includes a minimum purchase commitment and cost-plus pricing, but the business remains highly dependent on Westlake and related-party arrangements.
- A 100-basis-point increase in borrowing rates would raise annual interest expense by approximately $4.0m based on period-end debt. Other identified risks include commodity and energy prices, chemical-industry cycles, operating interruptions, environmental regulation, climate-related matters, and customer and market demand.
- Lawsuits remain pending related to the September 2021 Petro 2 quench-tower flash fire; settlements have been reached with most plaintiffs. The partnership stated it did not expect pending proceedings, after considering insurance, to materially adversely affect its financial condition, results or cash flows.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether lower commodity prices, feedstock costs and production volumes affect future margins and cash generation.
- Distribution sustainability: MLP distributable cash flow was below common-unit distributions in both Q3 and the first nine months.
- Exposure to higher variable interest rates and the terms, availability and Westlake concentration of the partnership’s debt and liquidity arrangements.
- Westlake’s continuing role as dominant customer, related-party counterparty and owner of the majority interest in OpCo.
- Developments in the Petro 2 litigation, environmental matters, and future maintenance and turnaround spending.