Westlake Chemical Partners LP 10-K

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Partnership Interests Our common units are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "WLKP." As of the close of business on February 23, 2021, based upon information received from our transfer agent, there were four holders of record of our common units. We are a publicly-traded partnership and are not subject to federal income tax. Instead, unitholders are required to report their allocable share of our income, gain, loss and deduction, regardless of whether we make distributions. Following the Partnership's cash distribution for the second quarter of 2017, the requirement under the Partnership's partnership agreement for the conversion of all subordinated units was satisfied. As a result, effective August 30, 2017, all of the subordinated units owned by Westlake were converted into common units on a one-for-one basis and thereafter participate on terms equal with all other common units in distributions of available cash. Selected Information from our Partnership Agreement Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions, minimum quarterly distributions and incentive distribution rights. Cash Distribution Policy Our partnership agreement provides that our general partner will make a determination as to whether to make a distribution, but our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors adopted a cash distribution policy in connection with the closing of the IPO that sets forth our general partner's intention with respect to the distributions to be made to unitholders. Pursuant to our cash distribution policy, within 60 days after the end of each quarter, we intend to make a minimum quarterly distribution of $0.2750 per unit to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. The board of directors may change our cash distribution policy at any time and from time to time, and even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner. Operating Surplus and Capital Surplus Any distribution we make is characterized as made from "operating surplus" or "capital surplus." Distributions from operating surplus are made differently than cash distributions we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the incentive distribution rights would generally not participate in any capital surplus distributions. Any distribution of capital surplus would result in a reduction of the minimum quarterly distribution and target distribution levels and, if we reduce the minimum quarterly distribution to zero and eliminate any unpaid arrearages, thereafter capital surplus would be distributed as if it were operating surplus and the incentive distribution rights would thereafter be entitled to participate in such distributions. In determining operating surplus and capital surplus, we will only take into account our proportionate share of our consolidated subsidiaries that are not wholly owned, such as OpCo. Minimum Quarterly Distribution On July 27, 2018, the partnership agreement was amended to revise the minimum quarterly distribution thresholds for the Partnership's incentive distribution rights. The amended partnership agreement provides that the Partnership will distribute cash each quarter to all the unitholders, pro-rata, until each common unit has received a distribution of $1.2938. If cash distributions to the Partnership's unitholders exceed $1.2938 per common unit in any quarter, the Partnership's unitholders and Westlake, as the holder of the Partnership's incentive distribution rights, will receive distributions according to the percentage allocations per the amended partnership agreement. For more information on the Partnership's amended distribution allocation percentages, see Note 9 "Distributions and Net Income Per Limited Partner Unit" to the consolidated financial statements within this report. 27 Table of Contents General Partner Interests and Incentive Distribution Rights Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity interests in us and will be entitled to receive distributions on any such interests. Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the target distribution levels have been achieved. Westlake currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest. Issuer Purchases of Equity Securities None. 28 Table of Contents Item 6. Selected Financial Data The following information should be read together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this report. Year Ended December 31, 2020 2019 2018 2017 2016 (in thousands of dollars, except unit amounts and per unit data) Statement of Operations Data: Net sales $ 966,670 $ 1,091,871 $ 1,285,622 $ 1,172,981 $ 986,736 Gross profit 378,883 379,428 377,159 403,667 391,331 Selling, general and administrative expenses 25,895 29,278 27,590 29,260 24,887 Income from operations 352,988 350,150 349,569 374,407 366,444 Interest expense (12,038) (19,623) (21,433) (21,861) (12,607) Other income, net 733 3,096 2,457 1,792 601 Income before income taxes 341,683 333,623 330,593 354,338 354,438 Provision for income taxes 564 728 22 1,280 1,035 Net income $ 341,119 $ 332,895 $ 330,571 $ 353,058 $ 353,403 Less: Net income attributable to noncontrolling interest in OpCo 274,952 271,914 281,224 304,388 312,463 Net income attributable to Westlake Chemical Partners LP and limited partners' interest in net income $ 66,167 $ 60,981 $ 49,347 $ 48,670 $ 40,940 Net income attributable to Westlake Chemical Partners LP per limited partner unit (basic and diluted) Common units $ 1.88 $ 1.77 $ 1.51 $ 1.72 $ 1.50 Subordinated units $ — $ — $ — $ 1.43 $ 1.50 Balance Sheet Data (end of period): Cash and cash equivalents $ 17,154 $ 19,923 $ 19,744 $ 27,008 $ 88,900 Working capital (1) 223,551 199,562 198,370 191,149 194,388 Total assets 1,356,488 1,393,456 1,462,125 1,515,276 1,555,228 Total debt 399,674 399,674 477,608 473,960 594,629 Partners' equity 915,137 952,135 934,081 998,749 920,963 Distributions per unit (2) $ 1.89 $ 1.84 $ 1.66 $ 1.48 $ 1.32 Other Operating Data: Cash flow from: Operating activities $ 373,397 $ 450,807 $ 436,151 $ 537,357 $ 287,726 Investing activities 2,032 (57,707) (51,812) (203,229) (299,481) Financing activities (378,198) (392,921) (391,603) (396,020) (68,904) Depreciation and amortization 103,154 107,320 108,842 113,985 98,210 Capital expenditures 36,968 43,707 39,862 68,858 299,638 MLP distributable cash flow (3) 71,983 73,181 60,024 54,700 32,405 EBITDA (4) $ 456,875 $ 460,566 $ 460,868 $ 490,184 $ 465,255 ______________________________ (1) Working capital equals current assets less current liabilities. (2) Distribution per unit represents cash distributions declared per common unit for the quarters ended March 31, June 30, September 30 and December 31. 29 Table of Contents (3) We use MLP distributable cash flow (a non-GAAP financial measure) to analyze our performance. The body of accounting principles generally accepted in the United States is commonly referred to as "GAAP." For this purpose, a non-GAAP financial measure is generally defined by the Securities and Exchange Commission ("SEC") as a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that (1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows ( or equivalent statements) of the registrant; or (2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. We define distributable cash flow 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 adjustment on derivative contracts. We define MLP distributable cash flow as distributable cash flow less distributable cash flow attributable to Westlake's noncontrolling interest in OpCo and distributions attributable to the incentive distribution rights holder. MLP distributable cash flow does not reflect changes in working capital balances. MLP distributable cash flow is a non-GAAP supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly-traded partnerships; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. MLP distributable cash flow is not a substitute for the GAAP measures of net income and net cash provided by operating activities. MLP distributable cash flow has important limitations as an analytical tool because it excludes some but not all items that affect net income and net cash provided by operating activities. It should be noted that other limited partnerships and companies calculate MLP distributable cash flows differently, and, therefore, MLP distributable cash flows as presented for us may not be comparable to MLP distributable cash flows reported by other partnerships and companies. The following table reconciles MLP distributable cash flow to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures. Reconciliation of MLP Distributable Cash Flow to Net Income and Net Cash Provided by Operating Activities Year Ended December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Net cash provided by operating activities $ 373,397 $ 450,807 $ 436,151 $ 537,357 $ 287,726 Loss from disposition of fixed assets (1,000) (515) (1,849) (3,033) (3,021) Changes in operating assets and liabilities and other (31,278) $ (117,397) (103,731) (181,266) 68,698 Net Income 341,119 332,895 330,571 353,058 353,403 Add: Depreciation, amortization and disposition of property, plant and equipment 104,154 107,835 110,691 117,128 98,210 Mark-to-market adjustment loss on derivative contracts (1,340) 1,301 62 — — Less: Contribution to turnaround reserves (39,937) (15,630) (16,840) (30,580) (40,014) Maintenance capital expenditures (37,343) (39,940) (31,481) (37,775) (120,353) Incentive distribution rights — — (733) (1,666) (281) Distributable cash flow attributable to noncontrolling interest in OpCo (294,670) (313,280) (332,246) (345,465) (258,560) MLP distributable cash flow $ 71,983 $ 73,181 $ 60,024 $ 54,700 $ 32,405 30 Table of Contents (4) EBITDA (a non-GAAP financial measure) is calculated as net income before interest expense, income taxes, depreciation and amortization. The body of accounting principles generally accepted in the United States is commonly referred to as "GAAP." For this purpose, a non-GAAP financial measure is generally defined by the SEC as a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that (1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or (2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. We use EBITDA to analyze our performance. EBITDA is a non-GAAP supplemental financial measure that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly-traded partnerships; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. EBITDA is not a substitute for the GAAP measures of net income, income from operations and net cash provided by operating activities. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA as presented for us may not be comparable to EBITDA reported by other companies. EBITDA has material limitations as a performance measure because it excludes interest expense, depreciation and amortization, and income taxes. The following table reconciles EBITDA to net income, income from operations and to cash flows from operating activities, the most directly comparable GAAP measures. Reconciliation of EBITDA to Net Income, Income from Operations and Net Cash Provided by Operating Activities Year Ended December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Net cash provided by operating activities $ 373,397 $ 450,807 $ 436,151 $ 537,357 $ 287,726 Loss from disposition of fixed assets (1,000) (515) (1,849) (3,033) (3.021) Changes in operating assets and liabilities and other (31,278) (117,397) (103,731) (181,266) 68,698 Net income 341,119 332,895 330,571 353,058 353,403 Less: Other income, net 733 3,096 2,457 1,792 601 Interest expense (12,038) (19,623) (21,433) (21,861) (12,607) Provision for income taxes (564) (728) (22) (1,280) (1,035) Income from operations 352,988 350,150 349,569 374,407 366,444 Add: Depreciation and amortization 103,154 107,320 108,842 113,985 98,210 Other income, net 733 3,096 2,457 1,792 601 EBITDA $ 456,875 $ 460,566 $ 460,868 $ 490,184 $ 465,255