Westlake Chemical Partners LP — Q1 2023 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2023. The Partnership owns 22.8% of Westlake Chemical OpCo LP (OpCo) and controls it through its general partner, so it consolidates OpCo; Westlake owns the remaining 77.2%. OpCo operates three ethylene production facilities and an ethylene pipeline. Ethylene sales to Westlake are primarily under a long-term, cost-plus agreement with a minimum purchase commitment.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total net sales | $307.7 million | $362.4 million |
| Gross profit / gross margin | $106.1 million / 34.5% | $91.4 million / 25.2% |
| Operating income | $98.2 million | $83.2 million |
| Consolidated net income | $91.5 million | $80.8 million |
| Net income attributable to the Partnership | $14.9 million; $0.42 per unit | $16.2 million; $0.46 per unit |
| EBITDA (non-GAAP) | $125.6 million | $114.5 million |
| MLP distributable cash flow (non-GAAP) | $17.6 million | $19.3 million |
| Cash provided by operating activities | $144.9 million | $104.8 million |
Cash, debt and liquidity at March 31, 2023: Cash and cash equivalents were $104.6 million, and $52.1 million was invested with Westlake under the Investment Management Agreement, which provides daily availability. Long-term debt owed to Westlake was $399.7 million, all variable-rate; the weighted-average rate was 6.4%, up from 4.8% at December 31, 2022. The revolvers mature July 12, 2027, and the Partnership reported covenant compliance. Current assets were $232.4 million versus current liabilities of $51.5 million. Capital expenditures were $12.7 million, compared with $20.3 million in Q1 2022.
Changes versus prior year
- Sales declined $54.7 million, or 15.1%, mainly because ethylene and co-product prices were lower. Management reported that lower average selling prices reduced sales 18.4%, partly offset by higher volume, which increased sales 3.3%.
- Gross profit and operating income rose despite lower sales. Management attributed the improvement primarily to lower ethane feedstock and natural gas costs and higher production volumes, partly offset by lower product prices.
- Partnership-attributable net income declined $1.3 million and MLP distributable cash flow fell $1.7 million, principally because of higher interest expense. Consolidated net income increased as operating results improved.
- Operating cash flow increased $40.1 million, mainly from a favorable working-capital swing; it should not be read as equivalent to a comparable increase in underlying earnings.
- Interest expense increased to $7.3 million from $2.2 million as average borrowing rates rose. Total debt remained $399.7 million.
Outlook, risks and notable items
- No specific earnings or production guidance was provided. Management said it expects available cash sources to meet short- and long-term requirements and support quarterly distributions, but Westlake is not obligated to provide additional financing.
- The general partner declared a $0.4714-per-unit quarterly distribution, payable May 26, 2023. The approximately $16.6 million total quarterly distribution exceeded Q1 Partnership-attributable net income of $14.9 million. The Partnership states distributions are not contractually required at any specified rate.
- Westlake accounted for 83.7% of Q1 net sales. The customer, financing, treasury and investment relationships with Westlake are material related-party dependencies.
- All debt is variable-rate and owed to Westlake affiliates. Management estimated that a 100-basis-point rate increase would add approximately $4.0 million to annual interest expense based on quarter-end debt.
- Approximately 5% of ethylene production is directly exposed to commodity prices; management says the minimum commitment and cost-plus contract substantially mitigate exposure on the balance. There were no open derivative positions at quarter end.
- Lawsuits remain pending over the September 2021 Petro 2 turnaround flash fire, which injured contractors. The Partnership expects insurance to cover most associated costs. It also faces environmental and other legal risks; management did not expect the proceedings discussed to materially affect results or financial condition.
- Management reported no material changes to the risk factors in the 2022 Form 10-K and no material change in internal control over financial reporting.
Investor verification priorities
- Track whether lower commodity prices, feedstock and energy costs, and production volumes continue to support margins and cash generation.
- Assess cash available for distributions against Partnership-attributable earnings and MLP distributable cash flow, noting the latter is a non-GAAP measure that excludes working-capital changes.
- Monitor variable-rate debt costs, leverage covenant headroom, and the Partnership’s reliance on Westlake for debt, treasury services and investment liquidity.
- Review the annual ethylene purchase commitment, buyer deficiency fees and shortfall collections, including the timing and size of related Westlake receivables.
- Follow developments in the Petro 2 litigation, insurance recovery, environmental obligations, and planned maintenance, turnaround and capital spending.