Business context and reporting period
Westlake Chemical Partners LP filed this Form 10-K for the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. The Partnership’s principal asset is a 22.8% limited partner interest in Westlake Chemical OpCo LP (OpCo), which it controls through OpCo’s general partner. OpCo operates three U.S. ethylene plants with combined annual capacity of about 3.72 billion pounds and a 200-mile pipeline. Westlake owns the remaining 77.2% of OpCo and 40.1% of the Partnership’s common units.
Westlake is the principal customer and feedstock supplier. Under the Ethylene Sales Agreement, it generally commits to buy 95% of OpCo’s planned production, subject to a 3.8-billion-pound annual cap; pricing is cost-based plus a fixed $0.10-per-pound margin.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total net sales | $1,593.1 million | $1,214.9 million |
| Gross profit / margin | $377.4 million / 23.7% | $441.7 million / 36.4% |
| Income from operations | $347.7 million | $410.7 million |
| Consolidated net income | $334.8 million | $401.4 million |
| Net income attributable to the Partnership | $64.2 million; $1.82 per unit | $82.5 million; $2.34 per unit |
| Net cash provided by operating activities | $463.7 million | $408.4 million |
| MLP distributable cash flow | $75.9 million | $70.1 million |
| EBITDA | $470.3 million | $519.6 million |
| Capital expenditures | $54.1 million | $81.2 million |
At year-end, cash and cash equivalents were $64.8 million and cash invested with Westlake under the Investment Management Agreement was $65.0 million. Debt payable to Westlake was $399.7 million, all variable-rate, with a 4.8% weighted-average rate and no scheduled maturities before 2027. The Partnership reported compliance with its credit covenants. Current assets of $245.8 million exceeded current liabilities of $66.9 million.
Annual distributions were $1.8856 per common unit, or approximately $66.4 million to the Partnership’s unitholders. The board declared a $0.4714-per-unit distribution for the quarter ended December 31, 2022, payable in February 2023. Distributions are discretionary and are not contractually guaranteed.
Material changes versus the prior comparable period
- Sales rose 31.1%, reflecting higher sales prices and volumes, including increased cost-based sales to Westlake and higher co-product sales. The filing reports a 20.3% increase in average sales prices and a 21.8% increase in sales volume.
- Profitability declined: gross profit fell $64.3 million, Partnership-attributable net income fell $18.4 million, and EBITDA fell $49.2 million. Higher ethane and natural gas costs, lower third-party ethylene prices, and lower deficiency/Shortfall revenue weighed on results. Gross margin narrowed from 36.4% to 23.7%.
- Buyer deficiency fees and Shortfall revenue were $23.8 million in 2022, versus a combined $110.3 million in 2021. Higher production in 2022 followed the Petro 2 turnaround and force majeure disruptions in 2021.
- Operating cash flow increased $55.3 million, while MLP distributable cash flow increased $5.8 million, primarily because turnaround reserves and maintenance capital spending were lower. Capital expenditures declined by $27.1 million.
- Interest expense rose to $13.4 million from $8.8 million, largely due to higher rates on Westlake debt. Both revolving credit facilities were amended to replace LIBOR with SOFR and extend maturity to July 12, 2027.
Outlook, risks, contingencies and unusual items
- No specific earnings or distribution guidance is provided. Management stated that available liquidity sources are expected to meet short- and long-term needs and support quarterly distributions, but the Partnership’s distribution policy may be changed or suspended.
- The Ethylene Sales, Feedstock Supply and related services agreements have initial terms through December 31, 2026, with renewal provisions. Failure to extend or replace these arrangements could materially affect cash flows.
- The Partnership is highly dependent on Westlake for sales, feedstock, operating services, employees and financing. Westlake accounted for 84.3% of 2022 net sales; the filing identifies Westlake creditworthiness and related-party dependence as significant risks.
- The Partnership has $399.7 million of variable-rate debt. Management estimates a 100-basis-point rate increase would add about $4.0 million to annual interest expense, based on year-end debt.
- A 2022 consent decree resolving an EPA flare matter requires corrective work estimated at approximately $110 million, including installations at OpCo facilities. Westlake is expected to indemnify OpCo for these costs; approximately $41.5 million in 2023 and $9.1 million in 2024 are expected for corrective actions. OpCo also estimates environmental compliance capital expenditures of $3.4 million in 2023 and $3.2 million in 2024.
- Lawsuits remain pending relating to a September 2021 Petro 2 flash fire that injured contractors. The Partnership expects insurance to cover most related costs and does not believe pending proceedings will have a material adverse effect.
- Additional risks include plant outages and turnarounds, severe weather, commodity and feedstock markets, environmental and climate regulation, cybersecurity, and partnership governance conflicts. Westlake controls the general partner; unitholders have limited voting rights.
- The auditor identified revenue under the Ethylene Sales Agreement as a critical audit matter, focusing on the fee calculation, buyer deficiency fees and Shortfall estimates. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile 2022 sales growth with the substantial decline in gross margin, EBITDA and Partnership-attributable earnings, including the effects of feedstock prices and prior-year deficiency/Shortfall revenue.
- Check collection of the 2022 $23.8 million buyer deficiency fee and remaining 2021 Shortfall amounts; the filing says the 2022 fee was received in January 2023 and some 2021 Shortfall remained due in 2023.
- Review Westlake’s ability and willingness to meet contractual obligations, and the renewal or replacement of key agreements after their initial terms end in 2026.
- Monitor variable-rate borrowing costs, leverage covenant headroom, and the availability and terms of Westlake-provided revolving credit.
- Track EPA consent-decree milestones, Westlake indemnification, expected corrective-action spending, and developments in the Petro 2 litigation and insurance recovery.
- Assess distribution coverage and sustainability: 2022 distributions to Partnership unitholders exceeded Partnership-attributable net income, and distributions are discretionary.