Westlake Chemical Partners(WLKP) - 2021 Q4 - Annual Report

PART I Business The Partnership operates ethylene production facilities through its 22.8% interest in OpCo, generating stable cash flows from a long-term, fee-based Ethylene Sales Agreement with Westlake General Overview Formed in 2014, the Partnership focuses on ethylene production through its 22.8% interest in OpCo, generating revenue from a cost-plus agreement with Westlake - The Partnership was formed by Westlake in March 2014 and owns a 22.8% limited partner interest in OpCo as of January 1, 2019[29] - OpCo's assets include three ethylene production facilities with a total annual capacity of approximately 3.7 billion pounds and a 200-mile ethylene pipeline[31] - A 12-year Ethylene Sales Agreement with Westlake requires Westlake to purchase 95% of OpCo's planned ethylene production on a cost-plus basis, generating a fixed margin of $0.10 per pound[33] Assets and Operations The Partnership's sole revenue-generating asset is its 22.8% interest in OpCo, which owns three ethylene production facilities with a total annual capacity of 3.72 billion pounds and a 200-mile ethylene pipeline OpCo's Ethylene Production Facilities (as of Dec 31, 2021) | Plant Location (Description) | Annual Production Capacity (millions of pounds) | Feedstock | Primary Uses of Ethylene | | :--- | :--- | :--- | :--- | | Lake Charles, Louisiana (Petro 1) | 1,500 | Ethane | PE and PVC | | Lake Charles, Louisiana (Petro 2) | 1,490 | Ethane, ethane/propane mix, propane, butane or naphtha | PE and PVC | | Calvert City, Kentucky (Calvert City Olefins) | 730 | Ethane or propane | PVC | | Total | 3,720 | | | - OpCo owns a 200-mile, 10-inch diameter ethylene pipeline system with a capacity of 3.5 million pounds per day, operated as a common carrier by Buckeye Development & Logistics I LLC[43] Agreements with Westlake The Partnership's operations are governed by foundational agreements with Westlake, including the Ethylene Sales Agreement for stable revenue, Feedstock Supply, Services, Site Leases, and an Omnibus Agreement for administrative and indemnification - Ethylene Sales Agreement: A 12-year agreement (through Dec 31, 2026, with automatic renewals) where Westlake purchases 95% of planned production at a price covering costs plus a $0.10/lb margin[46][49][50] - Feedstock Supply Agreement: A 12-year agreement where Westlake supplies OpCo with ethane and other feedstocks at a price based on an indexed spot price plus transportation and storage costs[52] - Services and Secondment Agreement: Westlake provides comprehensive operating services and seconds employees to OpCo to run its facilities[53] - Site Lease Agreements: OpCo leases the land for its Lake Charles and Calvert City facilities from Westlake under two 50-year agreements for $1 per year per site[54] - Omnibus Agreement: Westlake provides administrative services, holds a right of first refusal on asset transfers, and provides indemnification for certain environmental and other pre-IPO losses[55] Environmental Matters The Partnership faces extensive environmental regulations, requiring ongoing capital expenditures and anticipating $54.7 million for EPA-related corrective actions, largely indemnified by Westlake, alongside lawsuits from a 2021 flash fire with expected insurance coverage Environmental Capital Expenditures | Year | Actual/Estimated Capex (in millions) | | :--- | :--- | | 2021 (Actual) | $2.2 | | 2022 (Estimate) | $2.2 | | 2023 (Estimate) | $0.9 | - An additional $24.9 million in 2022 and $29.8 million in 2023 are expected for corrective actions related to an EPA flare enforcement matter. Westlake is expected to indemnify the Partnership for these costs under the Omnibus Agreement[62][63] - Lawsuits are pending from a flash fire at the Petro 2 facility in September 2021, but insurance is expected to cover most associated costs[64] Human Capital The Partnership and OpCo have no direct employees, with 151 personnel seconded from Westlake as of December 31, 2021, 25 of whom are covered by collective bargaining agreements that expire in November 2024 - The Partnership has no employees; 151 employees were seconded from Westlake to OpCo as of December 31, 2021[67] - Of the seconded employees, 25 are covered by collective bargaining agreements that expire on November 1, 2024[67] Risk Factors The Partnership faces significant risks from its substantial dependence on Westlake for cash flows and operations, operational hazards, extensive environmental regulations, structural risks from Westlake's control, and tax risks related to partnership status Risks Inherent in Our Business The business is heavily reliant on Westlake for cash flow and services, with potential for severe impact from Westlake's default or operational failures at its three core facilities, alongside risks from operating hazards, aging assets, environmental regulations, cybersecurity threats, and industry cyclicality - The Partnership is substantially dependent on Westlake for cash flows via the Ethylene Sales Agreement. A failure by Westlake to meet its obligations would materially harm the ability to make distributions[80][82] - The Ethylene Sales Agreement's fixed $0.10 per pound margin limits the ability to benefit from favorable market conditions, such as higher ethylene prices[93] - OpCo depends on Westlake for all operational services and its labor force under the Services and Secondment Agreement. Termination of this agreement would require finding alternative, potentially more costly, service providers[96] - Substantially all sales are generated from three facilities at two sites. An adverse event like an explosion, fire, or severe weather at either site could materially disrupt operations and cash flow[100][101] - Operations are subject to extensive environmental, health, and safety regulations, including potential new rules on greenhouse gas emissions, which could increase compliance costs[109][111] Risks Relating to Our Partnership Structure The partnership structure presents risks due to Westlake's control over the general partner, creating potential conflicts of interest, limiting unitholder rights, and including a general partner call right, with significant tax risks if partnership status is lost - Westlake controls the general partner, creating conflicts of interest where it may favor its own interests over those of the Partnership's unitholders[118] - The partnership agreement replaces traditional fiduciary duties with contractual standards, limiting the general partner's liability and restricting remedies available to unitholders[122][124] - Unitholders have limited voting rights, cannot elect directors, and cannot remove the general partner without its consent due to Westlake's significant ownership stake (40.1% of common units)[131][132] - The general partner has a call right to acquire all common units held by unaffiliated persons if its ownership exceeds 80%, potentially forcing unitholders to sell at an undesirable time or price[134] - The Partnership's favorable tax treatment depends on its status as a partnership. If treated as a corporation for tax purposes, it would be subject to entity-level taxation, substantially reducing cash available for distribution[148][151] Properties Details on the company's properties are cross-referenced to Item 1. Business—OpCo's Assets and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Details on the company's properties are cross-referenced to Item 1 and Item 7 of the report[179] Legal Proceedings The company is involved in ordinary course legal proceedings, but management does not expect a material adverse effect, with Westlake indemnifying for certain pre-IPO environmental liabilities - The company is involved in ordinary course legal proceedings but does not expect them to have a material adverse effect[179] - Westlake indemnifies OpCo for certain environmental liabilities that occurred before the IPO closing date[179] PART II Market for Common Equity and Related Matters The Partnership's common units trade on the NYSE under "WLKP" and are not subject to federal income tax, with a cash distribution policy targeting a minimum quarterly distribution of $0.2750 per unit, affecting payments to Westlake as the holder of incentive distribution rights - Common units are listed on the NYSE under the symbol "WLKP"[183] - The cash distribution policy targets a minimum quarterly distribution of $0.2750 per unit, though it is not a requirement[187] - Westlake holds the incentive distribution rights, which entitle it to increasing percentages of quarterly distributions from operating surplus after certain target distribution levels are met[191] Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership's financial performance is driven by its 22.8% interest in OpCo and the Ethylene Sales Agreement, providing stable revenue with a fixed $0.10/lb margin, leading to increased net income and cash flow in 2021, with liquidity maintained through operations, an Investment Management Agreement, and revolving credit facilities Results of Operations For 2021, net income rose to $401.4 million from $341.1 million in 2020, driven by higher third-party ethylene sales prices and increased buyer deficiency and shortfall revenue to $110.3 million, partially offset by lower sales volumes and higher feedstock costs, resulting in a gross profit margin decrease to 36.4% from 39.2% Consolidated Results of Operations (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total net sales | $1,214,858 | $966,670 | $1,091,871 | | Gross profit | $441,706 | $378,883 | $379,428 | | Income from operations | $410,688 | $352,988 | $350,150 | | Net income | $401,385 | $341,119 | $332,895 | | Net income attributable to Westlake Chemical Partners LP | $82,547 | $66,167 | $60,981 | | MLP distributable cash flow | $70,057 | $71,983 | $73,181 | | EBITDA | $519,564 | $456,875 | $460,566 | - The increase in 2021 net income was primarily due to higher sales prices for ethylene sold to third parties and an increase in buyer deficiency fee and Shortfall revenue to $110.3 million, compared to $69.6 million in 2020[223] - The positive revenue factors in 2021 were partially offset by lower sales volumes to Westlake due to the Petro 2 turnaround and other force majeure events, as well as higher feedstock and conversion costs[223] Cash Flows For 2021, cash provided by operating activities increased to $408.4 million from $373.4 million in 2020, driven by higher net income and favorable working capital, while investing activities used $64.3 million due to increased capital expenditures for the Petro 2 turnaround, and financing activities used $344.2 million primarily for distributions Summary of Cash Flows (in millions) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $408.4 | $373.4 | $450.8 | | Net cash provided by (used for) investing activities | $(64.3) | $2.0 | $(57.7) | | Net cash used for financing activities | $(344.2) | $(378.2) | $(392.9) | - The $35.0 million increase in operating cash flow in 2021 was mainly due to higher net income and favorable working capital changes, partially offset by costs for the Petro 2 facility turnaround[239] - Capital expenditures increased to $81.2 million in 2021 from $37.0 million in 2020, primarily due to the Petro 2 turnaround[241] Liquidity and Capital Resources The Partnership's primary liquidity sources are cash from operations, two revolving credit facilities with Westlake, and an Investment Management Agreement, with total outstanding debt of $399.7 million as of December 31, 2021, and an unused $50.0 million ATM program, ensuring sufficient liquidity for operations and distributions - The Partnership has an At-the-Market (ATM) program to sell up to $50.0 million in common units, but no units had been issued under this program as of December 31, 2021[246] - As of December 31, 2021, cash and cash equivalents were $17.1 million, with an additional $106.2 million of cash invested with Westlake under an Investment Management Agreement[254][255] Outstanding Debt to Westlake (as of Dec 31, 2021) | Facility | Outstanding Borrowings (in millions) | Maturity | | :--- | :--- | :--- | | OpCo Revolver | $22.6 | Sep 25, 2023 | | MLP Revolver | $377.1 | Mar 19, 2023 | | Total | $399.7 | | Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including assessing long-lived assets for impairment, fair value estimates for business combinations and derivatives, annual goodwill impairment testing for $5.8 million, and estimating environmental and legal obligations through professional consultation - Key estimates for long-lived assets include useful lives and recoverability. The company evaluates for impairment when events indicate the carrying amount may not be recoverable[264][265] - Turnaround costs are deferred and amortized over the period until the next planned turnaround (typically 5 years). In 2021, $131.2 million in turnaround costs were deferred[267] - Goodwill of $5.8 million is tested for impairment annually. The 2021 quantitative assessment did not indicate any impairment[270] Quantitative and Qualitative Disclosures about Market Risk The Partnership's direct commodity price risk is limited to approximately 5% of ethylene production sold to third parties, with the Ethylene Sales Agreement mitigating risk, while interest rate risk on $399.7 million of variable rate debt could increase annual interest expense by approximately $4.0 million for a 100 basis point rate hike - Direct commodity price risk is limited to about 5% of total ethylene production sold to third parties, with the Ethylene Sales Agreement mitigating risk on the rest[274] - The company is exposed to interest rate risk on its $399.7 million of variable rate debt. A 100 basis point (1%) increase in rates would increase annual interest expense by approximately $4.0 million[275] Financial Statements and Supplementary Data This section includes the consolidated financial statements for 2021, 2020, and 2019, Management's Report on Internal Control, the Independent Registered Public Accounting Firm's Report, and core financial statements along with detailed Notes to the Consolidated Financial Statements - Management concluded that the Partnership's internal control over financial reporting was effective as of December 31, 2021[280] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[285] - The auditor identified Revenue from the Ethylene Sales Agreement as a critical audit matter due to the significant effort required to evaluate the complex fee, buyer deficiency, and shortfall calculations[293][294] Consolidated Financial Statements The consolidated financial statements present the Partnership's financial position and results, with total assets of $1.48 billion and total equity of $972.7 million as of December 31, 2021, and net income of $401.4 million on total net sales of $1.21 billion with $408.4 million in net cash from operating activities for the year Key Balance Sheet Data (as of Dec 31, 2021, in thousands) | | Amount | | :--- | :--- | | Total current assets | $281,210 | | Property, plant and equipment, net | $1,043,539 | | Total assets | $1,480,698 | | Total current liabilities | $106,796 | | Long-term debt payable to Westlake | $399,674 | | Total liabilities | $508,000 | | Total equity | $972,698 | Key Statement of Operations Data (Year ended Dec 31, 2021, in thousands) | | Amount | | :--- | :--- | | Total net sales | $1,214,858 | | Gross profit | $441,706 | | Income from operations | $410,688 | | Net income | $401,385 | | Net income attributable to Westlake Chemical Partners LP | $82,547 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, including consolidating OpCo as a variable interest entity, mechanics of Westlake agreements, and breakdowns of financial statement items, with 2021 sales to Westlake of $1.027 billion including $51.4 million in buyer deficiency fees and $58.9 million in shortfall revenue, total debt to Westlake of $399.7 million, and coverage of commitments, contingencies, and related party transactions - The Partnership consolidates OpCo as it is deemed the primary beneficiary of a variable interest entity[315] - In 2021, due to force majeure events, the Partnership recognized $51.4 million in buyer deficiency fees and $58.9 million in Shortfall revenue from Westlake[391] - Total long-term debt payable to Westlake as of December 31, 2021, was $399.7 million, consisting of borrowings under the OpCo Revolver and the MLP Revolver, both maturing in 2023[371] - Lawsuits are pending related to a flash fire at the Petro 2 facility in September 2021, with most costs expected to be covered by insurance[429] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls reported during the fourth quarter of 2021 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021[435] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[437] PART III Directors, Executive Officers and Corporate Governance The Partnership is managed by the board and executive officers of its general partner, wholly owned by Westlake, with a seven-director board including three independent members, an audit committee, and a potential conflicts committee, operating under a Code of Ethics and Principles of Corporate Governance - The Partnership is managed by the board and officers of its general partner, which is a wholly-owned subsidiary of Westlake[442] - The general partner's board has seven directors, three of whom (G. Stephen Finley, Angela A. Minas, and Randy G. Woelfel) are independent[443][459] - The board has a standing audit committee and can form a conflicts committee, both comprised of independent directors, to oversee financial reporting and review potential conflicts of interest[461][463] Executive Compensation The Partnership has no direct employees, with executive officers' salaries allocated from Westlake, and non-employee directors receiving an annual retainer of approximately $180,000 in cash and phantom units, resulting in a CEO-to-median-employee pay ratio of 0.79 to 1 for 2021 - Executive officers are employees of Westlake, which allocates a portion of their base salaries to the Partnership. For 2021, 10% of the CEO's and 10% of the CFO's base salaries were allocated[469][490] 2021 NEO Compensation Allocated to the Partnership | Name and Principal Position | Total Allocated Salary | | :--- | :--- | | Albert Y. Chao, President and CEO | $116,317 | | M. Steven Bender, EVP and CFO | $63,883 | - Non-employee directors receive an annual retainer of approximately $180,000 ($80,000 in cash and $100,000 in phantom units), plus an additional $15,000 cash retainer for the audit committee chair[493] - The CEO pay ratio for 2021 was 0.79 to 1, comparing the CEO's allocated compensation of $116,317 to the median seconded employee's total compensation of $147,922[495][497] Security Ownership As of February 18, 2022, Westlake Corporation beneficially owned 40.1% of the Partnership's common units, with directors and executive officers as a group owning 45.0%, and other significant beneficial owners including Invesco Ltd. (16.6%), Energy Income Partners, LLC (7.0%), and First Trust Portfolios L.P. (5.2%) - Westlake Corporation beneficially owns 14,122,230 common units, representing a 40.1% interest[501] - All directors and executive officers as a group beneficially own 45.0% of the outstanding common units[501] Beneficial Owners of 5% or More (as of Feb 2022) | Name of Beneficial Owner | Percentage of Common Units | | :--- | :--- | | Invesco Ltd. | 16.6% | | Energy Income Partners, LLC | 7.0% | | First Trust Portfolios L.P. et al. | 5.2% | Certain Relationships and Related Transactions The Partnership has extensive related-party transactions with Westlake, which owns 40.1% of common units and 100% of the general partner, governed by long-term agreements, with conflicts of interest managed by an independent directors' committee, and in 2021, Westlake received $26.6 million in distributions and was reimbursed $185.4 million for expenses - Westlake owns 40.1% of common units, 100% of the general partner, and all incentive distribution rights, leading to numerous related-party transactions[510] - Potential conflicts of interest can be approved by a conflicts committee of independent directors or by a majority vote of unaffiliated unitholders[511][515] - In 2021, Westlake received approximately $26.6 million in distributions on its common units[517] - The Partnership reimbursed Westlake and its affiliates approximately $185.4 million for expenses incurred on its behalf in 2021[518] Principal Accountant Fees and Services PricewaterhouseCoopers LLP served as the independent registered public accounting firm, with total fees for 2021 of $1,018,328, comprising $765,000 for audit fees and $253,328 for tax fees, all pre-approved by the audit committee Accountant Fees (2021 vs 2020) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | $765,000 | $961,250 | | Tax fees | $253,328 | $245,770 | | Total | $1,018,328 | $1,207,020 | - The audit committee pre-approved all audit and non-audit services provided by PricewaterhouseCoopers LLP in 2021[534] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K, referencing financial statements in Item 8 and noting the omission of schedules, with a detailed index of exhibits including key organizational documents and material contracts - This section contains the index of all exhibits filed with the Form 10-K, including key organizational documents and material contracts[541][542][543]