Westlake Chemical Partners(WLKP) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Westlake Chemical Partners LP, covering financial condition, results of operations, market risks, and internal controls Item 1. Financial Statements This section presents Westlake Chemical Partners LP's unaudited consolidated financial statements, including balance sheets, operations, equity, and cash flows Consolidated Balance Sheets This section provides a snapshot of the Partnership's financial position, detailing assets, liabilities, and equity at specific reporting dates Consolidated Balance Sheets | Metric | March 31, 2022 (in thousands of dollars) | December 31, 2021 (in thousands of dollars) | | :----------------------------------- | :--------------------------------------- | :---------------------------------------- | | Total current assets | $274,727 | $281,210 | | Total assets | $1,454,366 | $1,480,698 | | Total current liabilities | $453,999 | $106,796 | | Total liabilities | $478,134 | $508,000 | | Total equity | $976,232 | $972,698 | - Total current liabilities significantly increased from $106,796 thousand at December 31, 2021, to $453,999 thousand at March 31, 2022, primarily due to a new 'Debt payable to Westlake' of $377,055 thousand classified as current[8] Consolidated Statements of Operations This section details the Partnership's financial performance over specific periods, including net sales, cost of sales, gross profit, and net income Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2022 (in thousands of dollars) | Three Months Ended March 31, 2021 (in thousands of dollars) | | :------------------------------------------------------------------ | :---------------------------------------------------------- | :---------------------------------------------------------- | | Total net sales | $362,400 | $268,207 | | Cost of sales | $270,961 | $180,508 | | Gross profit | $91,439 | $87,699 | | Income from operations | $83,212 | $79,026 | | Net income | $80,825 | $76,622 | | Net income attributable to Westlake Chemical Partners LP | $16,194 | $15,146 | | Net income per limited partner unit (basic and diluted) | $0.46 | $0.43 | - Total net sales increased by 35.1% year-over-year, from $268,207 thousand in Q1 2021 to $362,400 thousand in Q1 2022 Net income attributable to Westlake Chemical Partners LP increased by 6.9% from $15,146 thousand to $16,194 thousand[10] Consolidated Statements of Changes in Equity This section outlines the changes in the Partnership's equity components, reflecting net income, distributions, and other equity adjustments Consolidated Statements of Changes in Equity | Equity Component | Balance at Dec 31, 2021 (in thousands of dollars) | Net Income (in thousands of dollars) | Quarterly Distribution to Unitholders (in thousands of dollars) | Balance at Mar 31, 2022 (in thousands of dollars) | | :---------------------------------------------- | :------------------------------------------------ | :----------------------------------- | :-------------------------------------------------------------- | :------------------------------------------------ | | Common Unitholders—Public and Privately Held | $481,796 | $9,700 | $(9,946) | $481,550 | | Common Unitholder—Westlake | $54,754 | $6,494 | $(6,657) | $54,591 | | General Partner—Westlake | $(242,572) | — | — | $(242,572) | | Noncontrolling Interests in OpCo | $678,720 | $64,631 | $(60,688) | $682,663 | | Total | $972,698 | $80,825 | $(77,291) | $976,232 | - Total equity increased from $972,698 thousand at December 31, 2021, to $976,232 thousand at March 31, 2022, driven by net income of $80,825 thousand, partially offset by total distributions of $77,291 thousand[13] Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the Partnership over specific periods Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2022 (in thousands of dollars) | Three Months Ended March 31, 2021 (in thousands of dollars) | | :------------------------------------------------ | :---------------------------------------------------------- | :---------------------------------------------------------- | | Net cash provided by operating activities | $104,810 | $155,408 | | Net cash used for investing activities | $(25,342) | $(76,622) | | Net cash used for financing activities | $(77,291) | $(78,651) | | Net increase in cash and cash equivalents | $2,177 | $135 | | Cash and cash equivalents at end of period | $19,234 | $17,289 | - Net cash provided by operating activities decreased by $50.6 million year-over-year, from $155.4 million in Q1 2021 to $104.8 million in Q1 2022, primarily due to changes in working capital[16][101] - Net cash used for investing activities significantly decreased from $76.6 million in Q1 2021 to $25.3 million in Q1 2022, mainly due to decreased net cash used under the Investment Management Agreement, partially offset by increased capital expenditures[16][102] Note 1. Description of Business and Basis of Presentation This note describes Westlake Chemical Partners LP's business, its structure, and the basis for its consolidated financial statement presentation - Westlake Chemical Partners LP (the "Partnership") is a Delaware limited partnership formed in March 2014 to operate, acquire, and develop ethylene production facilities and related assets[19] - The Partnership holds a 22.8% limited partner interest and the entire non-economic general partner interest in Westlake Chemical OpCo LP ("OpCo"), consolidating OpCo's results due to its primary beneficiary status[20][23] - The remaining 77.2% limited partner interest in OpCo is owned by Westlake Corporation, which is recorded as a noncontrolling interest in the Partnership's consolidated financial statements[20][23] Note 2. Accounts Receivable—Third Parties This note provides details on the Partnership's accounts receivable from third parties, including trade customers and allowances for credit losses Accounts Receivable—Third Parties | Metric | March 31, 2022 (in thousands of dollars) | December 31, 2021 (in thousands of dollars) | | :------------------------------------ | :--------------------------------------- | :---------------------------------------- | | Trade customers | $27,468 | $5,875 | | Allowance for credit losses | $(1,056) | $(50) | | Accounts receivable, net—third parties | $26,412 | $5,825 | - Net accounts receivable from third parties increased significantly from $5,825 thousand at December 31, 2021, to $26,412 thousand at March 31, 2022, primarily driven by an increase in trade customers' receivables[27] Note 3. Inventories This note details the composition of the Partnership's inventories, including finished products and feedstock, additives, and chemicals Inventories | Inventory Type | March 31, 2022 (in thousands of dollars) | December 31, 2021 (in thousands of dollars) | | :------------------------------ | :--------------------------------------- | :---------------------------------------- | | Finished products | $6,191 | $5,458 | | Feedstock, additives and chemicals | $1,696 | $3,440 | | Total Inventories | $7,887 | $8,898 | - Total inventories decreased from $8,898 thousand at December 31, 2021, to $7,887 thousand at March 31, 2022, mainly due to a reduction in feedstock, additives, and chemicals[28] Note 4. Property, Plant and Equipment This note provides information on the Partnership's property, plant, and equipment, including depreciation expense - Depreciation expense on property, plant and equipment increased to $23,996 thousand for the three months ended March 31, 2022, from $22,802 thousand for the same period in 2021, included in cost of sales[29] Note 5. Deferred Charges and Other Assets This note details the Partnership's deferred charges and other assets, including amortization expense - Amortization expense on other assets increased to $7,286 thousand for the three months ended March 31, 2022, from $4,740 thousand for the same period in 2021, included in cost of sales[30] Note 6. Distributions and Net Income Per Limited Partner Unit This note outlines the Partnership's cash distributions to unitholders and the calculation of net income per limited partner unit - A quarterly cash distribution of $0.4714 per unit was declared for the three months ended March 31, 2022, payable on May 26, 2022[31] Distributions and Net Income Per Limited Partner Unit | Metric | Three Months Ended March 31, 2022 (in thousands of dollars) | Three Months Ended March 31, 2021 (in thousands of dollars) | | :------------------------------------------------------------------ | :---------------------------------------------------------- | :---------------------------------------------------------- | | Net income attributable to the Partnership | $16,194 | $15,146 | | Limited partners' distribution declared on common units | $16,600 | $16,593 | | Distribution in excess of net income | $(406) | $(1,447) | | Net income per limited partner unit (basic and diluted) | $0.46 | $0.43 | - The Partnership's distribution for Q1 2022 did not exceed the $1.2938 per unit threshold, meaning no distribution was made with respect to incentive distribution rights to Westlake[35] Note 7. Partners' Equity This note provides details on the Partnership's equity structure, including common units issued and private placements - No common units were issued under the $50 million Equity Distribution Agreement as of March 31, 2022[38] - On March 29, 2019, the Partnership completed a private placement of 2,940,818 common units at $21.40 per unit, with TTWF LP (Westlake's principal stockholder) acquiring 1,401,869 units[39] Note 8. Related Party Transactions This note details significant transactions between the Partnership and its related parties, primarily Westlake Corporation Related Party Transactions | Transaction Type | Three Months Ended March 31, 2022 (in thousands of dollars) | Three Months Ended March 31, 2021 (in thousands of dollars) | | :---------------------------------------------------------------------------- | :---------------------------------------------------------- | :---------------------------------------------------------- | | Net sales—Westlake | $290,657 | $219,803 | | Feedstock purchased from Westlake and included in cost of sales | $162,279 | $82,116 | | Other charges from Westlake and included in cost of sales | $39,467 | $31,842 | | Services received from Westlake and included in selling, general & admin expenses | $6,566 | $7,912 | | Goods and services purchased from Westlake and capitalized as assets | $750 | $403 | | Receivable under the Investment Management Agreement | $111,224 | $106,243 (Dec 31, 2021) | | Accounts receivable—Westlake | $109,732 | $142,791 (Dec 31, 2021) | | Accounts payable—Westlake | $34,471 | $10,796 (Dec 31, 2021) | | Total debt payable to Westlake | $399,674 | $399,674 (Dec 31, 2021) | - Westlake accounted for approximately 80.2% of the Partnership's net sales in Q1 2022, down from 82.0% in Q1 2021, indicating a continued major customer relationship[60] - Accounts payable to Westlake increased significantly from $10,796 thousand at December 31, 2021, to $34,471 thousand at March 31, 2022, primarily due to feedstock purchases and services[53][54] Note 9. Long-Term Debt Payable to Westlake This note provides information on the Partnership's long-term debt obligations to Westlake, including revolving credit facilities and their reclassification Long-Term Debt Payable to Westlake | Debt Type | March 31, 2022 (in thousands of dollars) | December 31, 2021 (in thousands of dollars) | | :----------- | :--------------------------------------- | :---------------------------------------- | | OpCo Revolver | $22,619 | $22,619 | | MLP Revolver | $377,055 | $377,055 | | Total debt | $399,674 | $399,674 | | Less current debt | $377,055 | — | | Long-term debt, net of current debt | $22,619 | $399,674 | - The MLP Revolver, totaling $377,055 thousand, was reclassified from long-term to current debt as of March 31, 2022, due to its scheduled maturity in March 2023[62] - The weighted average interest rate on all debt increased slightly from 2.1% at December 31, 2021, to 2.2% at March 31, 2022[62] Note 10. Fair Value Measurements This note describes the methodology used to determine the fair value of the Partnership's debt and its classification within the fair value hierarchy - The fair value of the Partnership's debt (OpCo Revolver and MLP Revolver) is determined using a discounted cash flow methodology, with significant unobservable inputs classified as Level 3 within the fair value hierarchy[66] Fair Value Measurements | Debt Type | March 31, 2022 Carrying Value (in thousands of dollars) | March 31, 2022 Fair Value (in thousands of dollars) | December 31, 2021 Carrying Value (in thousands of dollars) | December 31, 2021 Fair Value (in thousands of dollars) | | :----------- | :------------------------------------------------------ | :-------------------------------------------------- | :--------------------------------------------------------- | :----------------------------------------------------- | | OpCo Revolver | $22,619 | $23,135 | $22,619 | $23,276 | | MLP Revolver | $377,055 | $381,875 | $377,055 | $383,574 | Note 11. Supplemental Information This note provides additional financial information, including changes in accrued liabilities and capital expenditure-related liabilities - Accrued and other liabilities decreased significantly from $60,895 thousand at December 31, 2021, to $21,391 thousand at March 31, 2022, primarily due to a decrease in accrued turnaround costs[69] - Capital expenditure related liabilities, included in accounts payable—third parties and accrued and other liabilities, increased to $8,056 thousand at March 31, 2022, from $6,272 thousand at March 31, 2021[70] Note 12. Commitments and Contingencies This note outlines the Partnership's commitments and contingencies, including environmental regulations and pending legal proceedings - The Partnership is subject to environmental laws and regulations, with Westlake indemnifying for liabilities prior to August 4, 2014[71] - Lawsuits are pending in connection with the September 2021 flash fire at the Petro 2 facility, with most costs expected to be covered by insurance[72] - Management does not believe any current legal proceedings will have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the Partnership's financial condition, operations, non-GAAP measures, cash flow, and liquidity Partnership Overview This section provides an overview of Westlake Chemical Partners LP's business, structure, and primary assets - Westlake Chemical Partners LP is a Delaware limited partnership focused on operating, acquiring, and developing ethylene production facilities and related assets[76] - The Partnership's sole revenue-generating asset is its 22.8% limited partner interest in OpCo, which it controls through its ownership of OpCo's general partner[77] - OpCo's assets include three ethylene production facilities (Lake Charles Olefins and Calvert City Olefins) and a 200-mile common carrier ethylene pipeline (Longview Pipeline)[77] How We Generate Revenue This section explains the Partnership's revenue generation model, primarily through ethylene sales and a long-term, fee-based agreement with Westlake - Revenue is primarily generated from selling ethylene and co-products, with a substantial majority derived from a long-term, fee-based Ethylene Sales Agreement with Westlake[78] - The Ethylene Sales Agreement includes a minimum purchase commitment (95% of budgeted production) and variable pricing based on OpCo's feedstock, natural gas, and estimated other costs, plus a fixed margin of $0.10 per pound less co-product sales revenue[78] - In the event of a force majeure, the Partnership recognizes buyer deficiency fees, and any shortfall in production costs billed to Westlake is recoverable in the subsequent year[78][79] Operating Expenses, Maintenance Capital Expenditures and Turnaround Costs This section discusses how operating expenses, maintenance capital expenditures, and turnaround costs are managed and incorporated into the ethylene price - Operating expenses, maintenance capital expenditures, and turnaround costs are built into the ethylene price charged to Westlake, with non-feedstock costs based on forecasted amounts for a fixed 12-month period[81] - The Partnership manages these costs by scheduling maintenance and turnarounds over time to minimize variability in operating margins and cash flows, and reserves cash annually for turnaround costs[81] MLP Distributable Cash Flow and EBITDA This section defines and explains the non-GAAP financial measures of MLP distributable cash flow and EBITDA, used for assessing performance and investment viability - MLP distributable cash flow is defined as net income plus depreciation, amortization, and disposition of property, plant and equipment, less contributions for turnaround reserves, maintenance capital expenditures, and mark-to-market adjustments on derivative contracts, further adjusted for noncontrolling interest and incentive distribution rights[82] - EBITDA is defined as net income before interest expense, income taxes, depreciation, and amortization[82] - These non-GAAP measures are used by management and external users to assess operating performance, debt servicing ability, and investment viability, but are not substitutes for GAAP measures[82][83] Results of Operations This section analyzes the Partnership's financial results for the period, highlighting key drivers of changes in sales, gross profit, and non-GAAP metrics Results of Operations | Metric | Three Months Ended March 31, 2022 (in thousands of dollars) | Three Months Ended March 31, 2021 (in thousands of dollars) | | :------------------------------------------------------------------ | :---------------------------------------------------------- | :---------------------------------------------------------- | | Total net sales | $362,400 | $268,207 | | Gross profit | $91,439 | $87,699 | | Selling, general and administrative expenses | $8,227 | $8,673 | | Income from operations | $83,212 | $79,026 | | Net income attributable to Westlake Chemical Partners LP | $16,194 | $15,146 | | MLP distributable cash flow | $19,291 | $16,245 | | EBITDA | $114,469 | $106,575 | - Net sales increased by $94.2 million (35.1%) year-over-year, driven by a 22.0% increase in average sales price and an 18.1% increase in sales volume, primarily due to higher production and sales to Westlake and co-product sales[93][94] - Gross profit increased by $3.7 million, but the gross profit margin decreased from 32.7% to 25.2% due to higher ethane feedstock and natural gas costs, partially offset by higher prices and volumes[95] - MLP distributable cash flow increased by $3.1 million (19.0%) to $19.3 million, primarily due to increased earnings at OpCo and decreased turnaround reserves, partially offset by higher maintenance expense[98] - EBITDA increased by $7.9 million (7.4%) to $114.5 million, driven by higher ethylene sales volumes and prices to Westlake and co-product sales, partially offset by lower third-party ethylene sales prices and higher feedstock costs[99] Cash Flow Discussion This section discusses the Partnership's cash flow activities, analyzing changes in cash from operating, investing, and financing activities - Operating activities provided $104.8 million in cash in Q1 2022, a $50.6 million decrease from $155.4 million in Q1 2021, mainly due to an unfavorable change in working capital of $62.2 million[101] - Investing activities used $25.3 million in cash in Q1 2022, a decrease from $76.6 million used in Q1 2021, primarily due to decreased net cash used under the Investment Management Agreement, partially offset by increased capital expenditures[102] - Financing activities used $77.3 million in cash in Q1 2022, comparable to $78.7 million in Q1 2021, primarily for distributions to Westlake ($60.7 million) and other unitholders ($16.6 million)[103] Liquidity and Capital Resources This section discusses the Partnership's liquidity sources, capital expenditure funding, and revolving credit facilities - The Partnership expects to distribute most excess cash to partners and fund capital expenditures primarily from external sources, including borrowing from Westlake or future equity/debt issuances[105] - Sources of liquidity include cash from operations, the OpCo Revolver, the MLP Revolver, and potential future equity/debt issuances, which are believed to be sufficient for short-term working capital, long-term capital expenditures, and quarterly distributions[106] - As of March 31, 2022, cash and cash equivalents totaled $19.2 million, with an additional $111.2 million invested under the Investment Management Agreement with Westlake[111][112] - Total capital expenditures for Q1 2022 were $20.3 million, up from $12.7 million in Q1 2021, primarily for projects to improve production capacity, reduce costs, and for maintenance/safety[110] - The Partnership has two revolving credit facilities with Westlake affiliates: the OpCo Revolver ($22.6 million outstanding) and the MLP Revolver ($377.1 million outstanding), both bearing interest at LIBOR plus 2.0%[113][114] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Partnership's market risk exposure, focusing on commodity price and interest rate risks - Direct exposure to commodity price risk is limited to approximately 5.0% of total ethylene production sold to third parties, with indirect exposure substantially mitigated by the cost-plus based Ethylene Sales Agreement with Westlake[121] - The Partnership is exposed to interest rate risk from $399.7 million in variable rate debt (LIBOR plus 200 basis points) owed to Westlake subsidiaries as of March 31, 2022[122] - A hypothetical 100 basis point increase in the average interest rate on variable rate debt would increase annual interest expense by approximately $4.0 million[122] - The phase-out of LIBOR, expected to conclude by June 30, 2023, is being reviewed, but the impact is not expected to be material[123] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control - The President and CEO and Executive Vice President and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022[124] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2022[125] PART II. OTHER INFORMATION This section provides additional information, including updates on legal proceedings, risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings This section updates on legal proceedings, including EPA actions and flash fire lawsuits, with no material adverse financial impact - The EPA is conducting an enforcement initiative regarding flare emissions at Calvert City and Lake Charles facilities, potentially requiring corrective actions and monetary sanctions, for which Westlake is expected to indemnify the Partnership[128] - Lawsuits are pending in connection with the September 2021 flash fire at the Petro 2 facility, with most associated costs expected to be covered by insurance[129] - The Partnership does not believe that any of its legal proceedings will have a material adverse effect on its financial condition, results of operations, or cash flows[130] Item 1A. Risk Factors This section refers to the risk factors discussed in the 2021 Form 10-K, noting no material changes - There have been no material changes to the risk factors previously discussed in Item 1A, "Risk Factors" in the 2021 Form 10-K[131] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL - The exhibits include various organizational documents such as the Certificate of Limited Partnership and amendments to the First Amended and Restated Agreement of Limited Partnership for Westlake Chemical Partners LP and Westlake Chemical OpCo LP[133] - Certifications from the Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications) are filed herewith[133] - XBRL (eXtensible Business Reporting Language) taxonomy extension documents and the cover page interactive data file are also included as exhibits[133] SIGNATURES This section contains the official signatures of the Partnership's principal executive and financial officers - The report was signed on May 4, 2022, by Albert Chao, President, Chief Executive Officer and Director of Westlake Chemical Partners GP LLC (Principal Executive Officer), and M. Steven Bender, Executive Vice President, Chief Financial Officer and Director of Westlake Chemical Partners GP LLC (Principal Financial Officer)[139]