Westlake Chemical Partners(WLKP) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Westlake Chemical Partners LP's unaudited consolidated financial statements, including balance sheets, operations, cash flows, and notes, reflecting OpCo's consolidation Consolidated Balance Sheets Total assets decreased to $1.43 billion from $1.48 billion, primarily due to reduced Property, Plant, and Equipment, while total liabilities also decreased Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $284,222 | $281,210 | | Property, Plant and Equipment, net | $1,006,633 | $1,043,539 | | Total Assets | $1,431,166 | $1,480,698 | | Total Current Liabilities | $77,657 | $106,796 | | Long-term debt payable to Westlake | $399,674 | $399,674 | | Total Liabilities | $479,002 | $508,000 | | Total Equity | $952,164 | $972,698 Consolidated Statements of Operations Q3 2022 net income increased to $78.3 million due to a 41% rise in net sales, while YTD net income decreased to $243.6 million despite higher sales, primarily due to increased cost of sales Statement of Operations Summary (in thousands, except per unit data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $415,123 | $293,966 | $1,226,308 | $884,402 | | Gross Profit | $90,494 | $75,928 | $279,235 | $294,656 | | Income from Operations | $81,816 | $68,136 | $252,411 | $269,922 | | Net Income | $78,305 | $66,075 | $243,569 | $262,991 | | Net Income Attributable to WLKP | $14,757 | $12,790 | $47,389 | $53,035 | | Net Income per LP Unit (basic & diluted) | $0.42 | $0.36 | $1.35 | $1.51 | Consolidated Statements of Cash Flows Net cash from operating activities decreased to $341.2 million in YTD 2022, with $74.5 million used for investing and $264.3 million for financing activities, primarily distributions Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $341,162 | $386,577 | | Net cash used for investing activities | ($74,458) | ($111,364) | | Net cash used for financing activities | ($264,293) | ($273,720) | | Net increase in cash and cash equivalents | $2,411 | $1,493 | Notes to Consolidated Financial Statements Notes detail the Partnership's business structure, accounting policies, and financial items, including OpCo consolidation, related-party transactions, debt facilities, and legal contingencies - The Partnership holds a 22.8% limited partner interest in OpCo but consolidates its financial results as the primary beneficiary of OpCo, a variable interest entity (VIE), with Westlake's remaining 77.2% interest recorded as a noncontrolling interest[23][26] - A quarterly cash distribution of $0.4714 per unit for Q3 2022 was declared on October 31, 2022[34] Related Party Transactions with Westlake - YTD Sep 30 (in thousands) | Transaction Type | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales to Westlake | $1,020,042 | $708,646 | | Feedstock Purchases from Westlake | $603,243 | $302,095 | - Total long-term debt payable to Westlake was $399.7 million as of September 30, 2022, comprising the OpCo Revolver and MLP Revolver, both amended in July 2022 to extend maturity to 2027 and transition to SOFR[70][71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting stable revenue from a fee-based Ethylene Sales Agreement, analyzing Q3 and YTD 2022 results, and detailing liquidity, capital resources, financing, and non-GAAP reconciliations - The Partnership's revenue is primarily generated through a long-term, fee-based Ethylene Sales Agreement with Westlake, including a minimum purchase commitment for 95% of OpCo's budgeted ethylene production and a fixed margin of $0.10 per pound, which mitigates commodity price volatility[87] - In Q3 2022, the Partnership recognized a buyer deficiency fee of $13.9 million from Westlake due to lower planned ethylene offtake[104] Results of Operations Q3 2022 net sales increased 41.2% to $415.1 million with higher gross profit, while YTD net sales rose 38.7% to $1.23 billion, but gross profit decreased due to higher feedstock costs Key Operating Metrics: Percentage Change from Prior-Year Period | Metric | Q3 2022 vs Q3 2021 | YTD 2022 vs YTD 2021 | | :--- | :--- | :--- | | Average Sales Price | +24.5% | +28.4% | | Volume | +13.4% | +12.1% | | Fuel Cost (Natural Gas) | +102.8% | +107.1% | | Feedstock (Ethane) | +58.0% | +81.7% | - Q3 2022 gross profit increased primarily due to higher sales prices and volumes, partially offset by higher feedstock costs, resulting in a gross profit margin decrease from 25.8% to 21.8% YoY[107] - YTD 2022 gross profit decreased, with the margin falling to 22.8% from 33.3% YoY, mainly due to increased ethane and natural gas costs and lower third-party ethylene sales prices[113] Non-GAAP Financial Measures The company uses MLP Distributable Cash Flow and EBITDA to assess performance, with both increasing in Q3 2022 to $16.7 million and $111.8 million, respectively, driven by higher OpCo earnings Reconciliation of MLP Distributable Cash Flow (in thousands) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $78,305 | $66,075 | $243,569 | $262,991 | | MLP distributable cash flow | $16,734 | $12,977 | $55,609 | $54,760 | Reconciliation of EBITDA (in thousands) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $78,305 | $66,075 | $243,569 | $262,991 | | EBITDA | $111,825 | $94,746 | $344,776 | $352,804 | Liquidity and Capital Resources Liquidity stems from operations and Westlake credit facilities, with $19.5 million cash and $135.9 million invested, plus access to $600 million OpCo and MLP Revolvers, both amended to 2027 with SOFR rates - Cash flow from operations decreased by $45.4 million in the first nine months of 2022 compared to 2021, mainly due to unfavorable changes in working capital related to the timing of payments for the 2021 Petro 2 turnaround[118] - The Partnership has an At-the-Market (ATM) program to sell up to $50.0 million in common units, but no units were issued under this program as of September 30, 2022[121] - As of September 30, 2022, outstanding borrowings totaled $22.6 million under the OpCo Revolver and $377.1 million under the MLP Revolver[130][132] Quantitative and Qualitative Disclosures about Market Risk Primary market risks are commodity prices, largely mitigated by a cost-plus agreement limiting exposure to 5% of production, and interest rates, where a 1% increase on $399.7 million variable-rate debt would raise annual expense by $4.0 million - Direct exposure to commodity price risk is limited to approximately 5.0% of total ethylene production sold to third parties[139] - The Partnership has $399.7 million in variable-rate debt; a hypothetical 100 basis point (1%) increase in the average interest rate would increase annual interest expense by approximately $4.0 million[140] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting identified during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[141] - There were no changes in internal control over financial reporting during Q3 2022 that materially affected, or are reasonably likely to materially affect, internal controls[142] PART II. OTHER INFORMATION Legal Proceedings The Partnership faces legal proceedings, including an EPA consent decree with $110 million estimated costs expected to be indemnified by Westlake, and lawsuits from a 2021 flash fire, largely covered by insurance - Westlake has agreed to indemnify the Partnership for certain environmental liabilities that occurred prior to August 4, 2014[145] - A consent decree with the EPA regarding flare modifications is estimated to cost approximately $110 million, for which Westlake is expected to fully indemnify the Partnership[146] - Lawsuits are pending from a September 2021 flash fire at the Petro 2 facility; the company expects insurance to cover most of the associated costs[147] Risk Factors No material changes have occurred from the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in the 2021 Form 10-K[149] Exhibits This section lists exhibits filed with the 10-Q report, including credit agreement amendments, CEO/CFO certifications, and XBRL data files - Key exhibits filed include amendments to the OpCo and MLP Senior Unsecured Revolving Credit Agreements, and certifications from the Principal Executive Officer and Principal Financial Officer[151]