Westlake Chemical Partners(WLKP) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the period ended September 30, 2021, including key financial positions and performance such as total assets of $1.36 billion, net income of $66.1 million for Q3 2021, and net cash provided by operating activities of $386.6 million for the nine months ended September 30, 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $291,243 | $263,305 | | Total assets | $1,360,562 | $1,356,488 | | Total current liabilities | $54,559 | $39,754 | | Long-term debt payable to Westlake | $399,674 | $399,674 | | Total liabilities | $455,743 | $441,351 | | Total equity | $904,819 | $915,137 | Consolidated Statements of Operations Highlights (in thousands, except per unit data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $293,966 | $231,969 | $884,402 | $721,018 | | Gross profit | $75,928 | $100,391 | $294,656 | $293,969 | | Income from operations | $68,136 | $94,136 | $269,922 | $275,379 | | Net income | $66,075 | $91,848 | $262,991 | $265,995 | | Net income attributable to Westlake Chemical Partners LP | $12,790 | $18,535 | $53,035 | $51,142 | | Net income per limited partner unit (basic and diluted) | $0.36 | $0.53 | $1.51 | $1.45 | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $386,577 | $340,876 | | Net cash used for investing activities | ($111,364) | ($58,170) | | Net cash used for financing activities | ($273,720) | ($279,298) | | Net increase in cash and cash equivalents | $1,493 | $3,408 | - The Partnership operates ethylene production facilities and holds a 22.8% limited partner interest in Westlake Chemical OpCo LP ("OpCo"), which it consolidates as the primary beneficiary Westlake Chemical Corporation owns the remaining 77.2% interest in OpCo[22][23][26] - A quarterly cash distribution of $0.4714 per unit for Q3 2021 was declared on November 1, 2021, payable on November 29, 2021[37] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results of operations, highlighting the Partnership's reliance on a long-term, fee-based Ethylene Sales Agreement with Westlake for stable revenue, and analyzing key performance indicators, operational events, and liquidity Partnership Overview and Revenue Generation The Partnership's primary asset is its 22.8% limited partner interest in OpCo, with most revenue generated through a long-term, fee-based Ethylene Sales Agreement with Westlake, ensuring stable cash flows by insulating from commodity price volatility - The Partnership owns a 22.8% limited partner interest in OpCo, while Westlake retains the remaining 77.2% interest[84][85] - The core of the business model is the Ethylene Sales Agreement with Westlake, which features a take-or-pay commitment for 95% of annual budgeted production at a fixed margin of $0.10 per pound, plus pass-through of feedstock and other production costs[86] - In the event of a force majeure, the Partnership can recognize buyer deficiency fees representing the fixed margin and certain costs for production that would have occurred[86] Results of Operations For Q3 2021, net income decreased to $66.1 million from $91.8 million in Q3 2020, primarily due to higher feedstock costs and a significant buyer deficiency fee recognized in the prior-year period, while nine-month net income remained relatively stable at $263.0 million Q3 2021 vs. Q3 2020 Performance (in millions) | Metric | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $294.0 | $232.0 | +$62.0 | | Gross Profit | $75.9 | $100.4 | -$24.5 | | Net Income | $66.1 | $91.8 | -$25.7 | | Net Income attributable to Partnership | $12.8 | $18.5 | -$5.7 | | MLP Distributable Cash Flow | $13.0 | $21.2 | -$8.2 | | EBITDA | $94.7 | $120.1 | -$25.4 | Nine Months 2021 vs. 2020 Performance (in millions) | Metric | Nine Months 2021 | Nine Months 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $884.4 | $721.0 | +$163.4 | | Gross Profit | $294.7 | $294.0 | +$0.7 | | Net Income | $263.0 | $266.0 | -$3.0 | | Net Income attributable to Partnership | $53.0 | $51.1 | +$1.9 | | MLP Distributable Cash Flow | $54.8 | $56.4 | -$1.6 | | EBITDA | $352.8 | $353.9 | -$1.1 | - The Partnership recognized buyer deficiency fees and Shortfall of $21.5 million in the first nine months of 2021 due to force majeure events at its Petro 1 and Petro 2 facilities[94] Liquidity and Capital Resources The Partnership's liquidity is supported by cash from operations, two $600 million revolving credit facilities with Westlake, and a $50 million ATM equity program, with total debt at $399.7 million and sufficient resources for operational needs and distributions - Primary liquidity sources include cash from operations, the OpCo Revolver, the MLP Revolver, and a $50 million ATM Program No common units have been issued under the ATM program as of September 30, 2021[123][125] Debt Position as of September 30, 2021 (in millions) | Facility | Outstanding Borrowings | | :--- | :--- | | OpCo Revolver | $22.6 | | MLP Revolver | $377.1 | | Total Debt | $399.7 | - As of September 30, 2021, the Partnership had $18.6 million in cash and cash equivalents, plus an additional $196.3 million of cash invested with Westlake under an Investment Management Agreement[130][131] - Total capital expenditures for the nine months ended September 30, 2021 were $38.5 million[129] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Partnership's commodity price risk is limited to about 5% of ethylene production due to its cost-plus Ethylene Sales Agreement, while its primary market risk is interest rate risk on $399.7 million in variable-rate debt, where a 100 basis point increase would raise annual interest expense by approximately $4.0 million - Direct exposure to commodity price risk is limited to approximately 5% of total ethylene production sold to third parties, as the Ethylene Sales Agreement with Westlake mitigates the risk for the majority of sales[140] - The company is exposed to interest rate risk on its $399.7 million of variable-rate debt A hypothetical 100 basis point (1%) increase in interest rates would increase annual interest expense by approximately $4.0 million[141] - The company is monitoring the phase-out of LIBOR, set to conclude by June 30, 2023, but does not currently expect the impact to be material[142] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation by management, the President and CEO, and the EVP and CFO, the Partnership's disclosure controls and procedures were deemed effective as of the end of the period covered by the report[143] - There were no changes in internal control over financial reporting during Q3 2021 that have materially affected, or are reasonably likely to materially affect, internal controls[144] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Partnership is involved in legal proceedings incidental to its business, including a potential EPA enforcement action regarding flare emissions (indemnified by Westlake) and five pending lawsuits related to a flash fire at the Petro 2 facility, none of which management believes will have a material adverse effect - The EPA is conducting an enforcement initiative regarding flare emissions at the Calvert City and Lake Charles facilities, which may result in a monetary sanction over $0.3 million Westlake is expected to fully indemnify the Partnership for such costs[147] - Five lawsuits are pending in connection with a flash fire that occurred at the Petro 2 facility's quench tower during its turnaround in September 2021[81][148] - Management does not believe that any current legal proceedings will have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows[149] Item 1A. Risk Factors This section refers to the risk factors disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, stating no material changes from those previously disclosed - There have been no material changes from the risk factors previously disclosed in the 2020 Form 10-K[150] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and XBRL data files - The report lists exhibits filed concurrently, including certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL-related documents[151]