What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 92 added, 56 removed, 223 unchanged (40% of the section changed)

57 unchanged sentences

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 is not a substitute for the GAAP measures of net income or 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.

EBITDA is not a substitute for the GAAP measures of net income, income from operations and net cash provided by operating activities.

EBITDA is not a substitute for the GAAP measures of net income, income from operations or 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.

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Reconciliations for each of MLP distributable cash flow and EBITDA are included in the "Results of Operations" section below.

Recent Development

Calvert City Olefins Turnaround

During May 2023, we performed our planned major maintenance activities, or turnaround, of OpCo's Calvert City Olefins production facility located at Westlake's Calvert City, Kentucky site.

Results of Operations

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands)

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Interest expense—Westlake (6,117) (2,859) (13,432) (5,058)

Other income (expense), net 820 (25)

Other income, net 1,061 90 1,881 65

Income before income taxes 75,437 84,614 167,101 165,602

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(2) See "Reconciliation of EBITDA to Net Income, Income from Operations and Net Cash Provided by Operating Activities" below.

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Sales Price Volume Average

Sales Price Volume

Net sales percentage change from prior-year period due to average sales price and volume -33.0 % -8.1 % -26.8 % -2.7 %

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Domestic US prices percentage change from prior-year period for fuel cost and feedstock

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The following table presents reconciliations of MLP distributable cash flow to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands)

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The following table presents reconciliations of EBITDA to net income, income from operations and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands)

3 unchanged sentences

Net income 75,264 84,439 166,716 165,264

Other income (expense), net 820 (25)

Other income, net 1,061 90 1,881 65

Interest expense—Westlake (6,117) (2,859) (13,432) (5,058)

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Depreciation and amortization 27,040 31,009 53,676 62,291

Other income (expense), net 820 (25)

Other income, net 1,061 90 1,881 65

EBITDA $ 108,594 $ 118,482 $ 234,209 $ 232,951

For the quarter ended March 31, 2023, net income was $91.5 million on net sales of $307.7 million.

This represents an increase in net income of $10.7 million as compared to net income of $80.8 million on net sales of $362.4 million for the quarter ended March 31, 2022.

Net income attributable to the Partnership for the first quarter of 2023 was $14.9 million as compared to $16.2 million for the first quarter of 2022, a decrease of $1.3 million.

Income from operations was $98.2 million for the first quarter of 2023 as compared to $83.2 million for the first quarter of 2022.

Net income and operating income for the first quarter of 2023 as compared to the first quarter of 2022 were higher primarily due to lower ethane feedstock costs and natural gas prices as well as higher production resulting in higher ethylene sales volumes in the first quarter of 2023 compared to the first quarter of 2022, partially offset by lower ethylene and co-products sales prices.

Net income attributable to the Partnership for the first quarter of 2023 decreased as compared to the first quarter of 2022 due to higher interest expense attributable to the Partnership, partially offset by the higher income from operations as discussed above.

Net sales for the first quarter of 2023 decreased by $54.7 million as compared to net sales for the first quarter of 2022, mainly due to lower ethylene and co-products sales prices during the first quarter of 2023 as compared to the first quarter of 2022.

For the quarter ended June 30, 2023, net income was $75.3 million on net sales of $264.2 million.

This represents a decrease in net income of $9.1 million as compared to net income of $84.4 million on net sales of $448.8 million for the quarter ended June 30, 2022.

Net income attributable to the Partnership for the second quarter of 2023 was $11.9 million as compared to $16.4 million for the second quarter of 2022, a decrease of $4.5 million.

Income from operations was $80.5 million for the second quarter of 2023 as compared to $87.4 million for the second quarter of 2022.

Income from operations, net income and net income attributable to the Partnership for the second quarter of 2023 as compared to the second quarter of 2022 were lower primarily due to lower ethylene and co-products sales prices and lower volumes due to the planned Calvert City Olefins turnaround in the second quarter of 2023 compared to the second quarter of 2022, partially offset by lower ethane feedstock costs and natural gas prices.

Net income attributable to the Partnership was also impacted by higher interest expense attributable to the Partnership for the second quarter of 2023 as compared to the second quarter of 2022, primarily due to a higher average interest rate on debt owed to Westlake.

Net sales for the second quarter of 2023 decreased by $184.6 million as compared to net sales for the second quarter of 2022, mainly due to lower ethylene and co-products sales prices and lower volumes due to the turnaround during the second quarter of 2023 as compared to the second quarter of 2022.

For the six months ended June 30, 2023, net income was $166.7 million on net sales of $571.9 million.

This represents an increase in net income of $1.4 million as compared to net income of $165.3 million on net sales of $811.2 million for the six months ended June 30, 2022.

Net income attributable to the Partnership for the six months ended June 30, 2023 was $26.8 million as compared to $32.6 million for the six months ended June 30, 2022, a decrease of $5.8 million.

Income from operations was $178.7 million for the six months ended June 30, 2023 as compared to $170.6 million for the six months ended June 30, 2022.

Income from operations and net income for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 were higher primarily due to lower ethane feedstock costs and natural gas prices in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, partially offset by lower ethylene and co-products sales prices and lower volumes due to the turnaround.

Net income attributable to the Partnership for the six months ended June 30, 2023 decreased as compared to the six months ended June 30, 2022 primarily due to higher interest expense attributable to the Partnership, partially offset by the higher income from operations as discussed above.

N et sales for the six months ended June 30, 2023 decreased by $239.3 million as compared t o net sales for the six months ended June 30, 2022, mainly due to lower ethylene and co-products sales prices and lower volumes due to the turnaround during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

RESULTS OF OPERATIONS

First Quarter 2023 Compared with First Quarter 2022

Total net sales decreased by $54.7 million, or 15.1%, to $307.7 million in the first quarter of 2023 from $362.4 million in the first quarter of 2022.

The decrease in net sales in the first quarter of 2023 was primarily due to lower ethylene and co-products sales prices, partially offset by higher production resulting in an increase in ethylene sales volumes during the first quarter of 2023 as compared to the first quarter of 2022.

The lower average sales prices in the first quarter of 2023 contributed to an 18.4% decrease in net sales compared to the first quarter of 2022.

The higher sales volumes in the first quarter of 2023 contributed to an increase in net sales of 3.3% as compared to the first quarter of 2022.

Second Quarter 2023 Compared with Second Quarter 2022

Total net sales decreased by $184.6 million, or 41.1%, to $264.2 million in the second quarter of 2023 from $448.8 million in the second quarter of 2022.

The decrease in net sales in the second quarter of 2023 was primarily due to lower ethylene and co-products sales prices and volumes during the second quarter of 2023 as compared to the second quarter of 2022.

The lower average sales prices in the second quarter of 2023 contributed to a 33.0% decrease in net sales compared to the second quarter of 2022.

The lower sales volumes in the second quarter of 2023 contributed to an 8.1% decrease in net sales compared to the second quarter of 2022.

The lower sales volumes were primarily due to the turnaround in the second quarter of 2023.

Gross Profit.

Gross profit increased to $106.1 million in the first quarter of 2023 from $91.4 million in the first quarter of 2022.

The gross profit margin in the first quarter of 2023 was 34.5%, as compared to 25.2% for the first quarter of 2022.

The increase in gross profit and gross profit margin was primarily due to lower ethane feedstock costs and natural gas prices in the first quarter of 2023 compared to the first quarter of 2022, partially offset by lower ethylene and co-products sales prices.

Gross profit decreased to $87.7 million in the second quarter of 2023 from $97.3 million in the second quarter of 2022.

The gross profit margin in the second quarter of 2023 was 33.2%, as compared to 21.7% for the second quarter of 2022.

The increase in gross profit margin was primarily due to lower ethane feedstock costs and natural gas prices in the second quarter of 2023 as compared to the second quarter of 2022.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased by $0.3 million, or 3.7%, to $7.9 million in the first quarter of 2023 as compared to $8.2 million in the first quarter of 2022.

The decrease in the first quarter of 2023 was mainly attributable to a decrease in the provision for doubtful accounts as compared to the first quarter of 2022.

Interest Expense.

Interest expense of $7.3 million in the first quarter of 2023 increased from $2.2 million in the first quarter 2022 due to a higher average interest rate on debt owed to Westlake compared to the first quarter of 2022.

Other Income (Expense), net .

Other income, net of $0.8 million in the first quarter of 2023 primarily represents interest earned on the balance with Westlake under the Investment Management Agreement.

Selling, general and administrative expenses decreased by $2.7 million, or 27.3%, to $7.2 million in the second quarter of 2023 as compared to $9.9 million in the second quarter of 2022.

The decrease in the second quarter of 2023 was mainly attributable to the provision for credit losses recognized in the second quarter of 2022.

Interest Expense—Westlake.

Interest expense of $6.1 million in the second quarter of 2023 increased from $2.9 million in the second quarter of 2022 due to a higher average interest rate on debt owed to Westlake.

Other Income, net .

Other income, net of $1.1 million in the second quarter of 2023 primarily represents interest earned on the balance with Westlake under the Investment Management Agreement.

MLP Distributable Cash Flow.

MLP distributable cash flow decreased by $1.7 million to $17.6 million in the first quarter of 2023 from $19.3 million in the first quarter of 2022.

The decrease in the first quarter of 2023, as compared to the prior-year period, was primarily attributable to higher interest expense, partially offset by increased earnings at OpCo and decreased maintenance capital expenditures.

EBITDA increased by $11.1 million to $125.6 million in the first quarter of 2023 from $114.5 million in the first quarter of 2022.

The increase was primarily due to lower ethane feedstock costs and natural gas prices as well as higher ethylene sales volumes during the first quarter of 2023 as compared to the first quarter of 2022, partially offset by lower ethylene and co-products sales prices.

CASH FLOW DISCUSSION FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

MLP distributable cash flow decreased by $4.6 million to $15.0 million in the second quarter of 2023 from $19.6 million in the second quarter of 2022.

The decrease in the second quarter of 2023, as compared to the prior-year period, was primarily attributable to higher interest expense and decreased earnings at OpCo, partially offset by decreased maintenance capital expenditures.

EBITDA decreased by $9.9 million to $108.6 million in the second quarter of 2023 from $118.5 million in the second quarter of 2022.

The decrease was primarily due to lower ethylene and co-products sales prices and volumes during the second quarter of 2023 as compared to the second quarter of 2022, partially offset by lower ethane feedstock costs and natural gas prices.

Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

Total net sales decreased by $239.3 million, or 29.5%, to $571.9 million in the six months ended June 30, 2023 from $811.2 million in the six months ended June 30, 2022.

The decrease in net sales in the six months ended June 30, 2023 was primarily due to lower ethylene and co-products sales prices and volumes during the six months ended June 30, 2023 as co mpared to the six months ended June 30, 2022.

The lower average sales prices in the six months ended June 30, 2023 contributed to a 26.8% decrease in net sales compared to the six months ended June 30, 2022.

The lower sales volumes in the six months ended June 30, 2023 contributed to a 2.7% decrease in net sales as compared to the six months ended June 30, 2022.

The lower sales volumes were primarily due to the turnaround in the six months ended June 30, 2023 .

Gross Profit.

Gross profit increased to $193.8 million in the six months ended June 30, 2023 from $188.7 million in the six months ended June 30, 2022.

The gross profit margin in the six months ended June 30, 2023 was 33.9%, as compared to 23.3% for the six months ended June 30, 2022.

The increase in gross profit margin was primarily due to lower ethane feedstock costs and natural gas prices in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased by $3.0 million, or 16.6% , to $15.1 million in the six months ended June 30, 2023 as compared to $18.1 million in the six months ended June 30, 2022.

The decrease in the six months ended June 30, 2023 was mainly attributable to the provision for credit losses recognized in the six months ended June 30, 2022.

Interest Expense —Westlake .

Interest expense of $13.4 million in the six months ended June 30, 2023 increased from $5.1 million in the six months ended June 30, 2022 due to a higher average interest rate on debt owed to Westlake.

Other Income, net .

Other income, net of $1.9 million in the six months ended June 30, 2023 primarily represents interest earned on the balance with Westlake under the Investment Management Agreement.

MLP Distributable Cash Flow.

MLP distributable cash flow decreased by $6.4 million to $32.5 million in the six months ended June 30, 2023 from $38.9 million in the six months ended June 30, 2022.

The decrease in the six months ended June 30, 2023, as compared to the prior-year period, was primarily attributable to higher interest expense, partially offset by increased earnings at OpCo and decreased maintenance capital expenditures.

EBITDA increased by $1.2 million to $234.2 million in the six months ended June 30, 2023 from $233.0 million in the six months ended June 30, 2022.

The increase was primarily due to lower ethane feedstock costs and natural gas prices during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, partially offset by lower ethylene and co-products sales prices and volumes.

CASH FLOW DISCUSSION FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

Operating Activities

Operating activities provided cash of $144.9 million in the first three months of 2023 compared to cash provided by operating activities of $104.8 million in the first three months of 2022.

The $40.1 million increase in cash flows from operating activities was mainly due to an increase in cash provided by working capital during the three months ended March 31, 2023 as compared to the prior-year period.

Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable, net—Westlake, accounts receivable, net—third parties, inventories, prepaid expenses and other current assets less accounts payable—Westlake, accounts payable—third parties and accrued and other liabilities, provided cash of $28.3 million in the first three months of 2023 as compared to $10.7 million of cash used in the first three months of 2022, resulting in an overall favorable change of $39.0 million.

The favorable change in working capital was mainly attributable to a favorable change in accounts receivable—third parties, accounts payable—third parties and accrued and other liabilities primarily due to the timing of payment of accruals and the impact on accounts receivable of the Petro 2 turnaround activities in 2021, which impacted the changes in working capital in the first three months of 2022.

These favorable changes were partially offset by an unfavorable change in net accounts receivable—Westlake primarily due to a smaller buyer deficiency fee collected in the first three months of 2023 as compared to the first three months of 2022.

Operating activities provided cash of $243.4 million in the first six months of 2023 compared to cash provided by operating activities of $225.7 million in the first six months of 2022.

The $17.7 million increase in cash flows from operating activities was mainly due to an increase in cash provided by working capital during the six months ended June 30, 2023 as compared to the prior-year period, which was partially offset by the cash used for the Calvert City Olefins turnaround activity.

Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable, net—Westlake, accounts receivable, net—third parties, inventories, prepaid expenses and other current assets less accounts payable—Westlake, accounts payable—third parties and accrued and other liabilities, provided cash of $49.7 million in the first six months of 2023 as compared to $6.1 million of cash used in the first six months of 2022, resulting in an overall favorable change of $55.8 million.

These favorable changes were partially offset by an unfavorable change in net accounts receivable—Westlake primarily due to an unfavorable change in accounts payable—Westlake due to fluctuating ethane feedstock costs and a smaller buyer deficiency fee and Shortfall collected in the first six months of 2023 as compared to the first six months of 2022.

Investing Activities

Net cash provided by investing activities in the first three months of 2023 was $0.2 million as compared to net cash used for investing activities of $25.3 million in the first three months of 2022.

The $25.5 million increase in net cash was mainly due to net cash provided by the Investment Management Agreement of $12.9 million in the first three months of 2023 compared to net cash used by the Investment Management Agreement of $5.0 million in the first three months of 2022.

Additionally, capital expenditures decreased in the first three months of 2023 as compared to the prior-year period.

Capital expenditures in the first three months of 2023 and 2022 were primarily related to projects to improve production capacity or reduce costs, maintenance and safety and environmental projects at our facilities.

Net cash used for investing activities in the first six months of 2023 was $46.3 million as compared to net cash used for investing activities of $55.3 million in the first six months of 2022.

The $9.0 million decrease in net cash used for investing activities was mainly due to the decrease in capital expenditures in the first six months of 2023 as compared to the prior-year period, partially offset by an increase in net cash invested under the Investment Management Agreement.

Capital expenditures in the first six months of 2023 and 2022 were primarily related to projects to improve production capacity or reduce costs, maintenance and safety and environmental projects at our facilities.

Financing Activities

Net cash used for financing activities in the first three months of 2023 was $105.3 million as compared to net cash used for financing activities of $77.3 million in the first three months of 2022.

The outflows in the first three months of 2023 were related to distributions of $88.7 million to the noncontrolling interest retained in OpCo by Westlake and of $16.6 million to unitholders by the Partnership.

The cash outflows in the first three months of 2022 were related to distributions of $60.7 million to the noncontrolling interest retained in OpCo by Westlake and of $16.6 million to unitholders by the Partnership.

Net cash used for financing activities in the first six months of 2023 was $202.5 million as compared to net cash used for financing activities of $169.0 million in the first six months of 2022.

The outflows in the first six months of 2023 were related to distributions of $169.3 million to the noncontrolling interest retained in OpCo by Westlake and of $33.2 million to unitholders by the Partnership.

The cash outflows in the first six months of 2022 were related to distributions of $135.8 million to the noncontrolling interest retained in OpCo by Westlake and of $33.2 million to unitholders by the Partnership.

LIQUIDITY AND CAPITAL RESOURCES

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The Partnership intends to use the net proceeds of sales of the common units, if any, for general partnership purposes, which may include the funding of potential drop-downs and other acquisitions.

No common units had been issued under the ATM Program as of March 31, 2023.

No common units had been issued under the ATM Program as of June 30, 2023.

Based on the terms of our cash distribution policy, we expect that we will distribute to our partners most of the excess cash generated by our operations.

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Westlake's credit facility and various indentures do not prevent OpCo from making distributions to us.

On May 2, 2023, the board of directors of Westlake Chemical Partners GP LLC, our general partner, approved a quarterly distribution of $0.4714 per unit payable on May 26, 2023 to unitholders of record as of May 12, 2023, which equates to a total amount of approximately $16.6 million per quarter, or approximately $66.4 million per year in aggregate, based on the number of common units outstanding on March 31, 2023.

On August 1, 2023, the board of directors of Westlake Chemical Partners GP LLC, our general partner, approved a quarterly distribution of $0.4714 per unit payable on August 25, 2023 to unitholders of record as of August 11, 2023, which equates to a total amount of approximately $16.6 million per quarter, or approximately $66.4 million per year in aggregate, based on the number of common units outstanding on June 30, 2023.

We do not have a legal or contractual obligation to pay distributions on a quarterly basis or any other basis at our minimum quarterly distribution rate or any other rate.

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Westlake has historically funded expansion capital expenditures related to Lake Charles Olefins and Calvert City Olefins.

No such funding was required by OpCo during the three months ended March 31, 2023 and 2022.

Total capital expenditures for the three months ended March 31, 2023 and 2022 were $12.7 million and $20.3 million, respectively.

No such funding was required by OpCo during the six months ended June 30, 2023 and 2022.

Total capital expenditures for the six months ended June 30, 2023 and 2022 were $17.2 million and $32.3 million, respectively.

We expect that Westlake will loan additional cash to OpCo to fund its expansion capital expenditures in the future, but Westlake is under no obligation to do so.

Cash and Cash Equivalents

As of March 31, 2023, our cash and cash equivalents totaled $104.6 million.

As of June 30, 2023, our cash and cash equivalents totaled $59.4 million.

In addition, we have cash invested under the Investment Management Agreement (as described below) and a revolving credit facility with Westlake available to supplement cash if needed, as described under "Indebtedness" below.

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Per the terms of the Investment Management Agreement, the Partnership earns a market return plus five basis points and Westlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo.

The Partnership had $52.1 million of cash invested under the Investment Management Agreement at March 31, 2023.

The Partnership had $94.2 million of cash invested under the Investment Management Agreement at June 30, 2023.

OpCo Revolver

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The Applicable Margin under the OpCo Revolver is 1.75%.

As of March 31, 2023, outstanding borrowings under the OpCo Revolver totaled $22.6 million and bore interest at SOFR plus the Applicable Margin and credit spread adjustment, which is accrued in arrears quarterly.

As of June 30, 2023, outstanding borrowings under the OpCo Revolver totaled $22.6 million and bore interest at SOFR plus the Applicable Margin and credit spread adjustment, which is accrued in arrears quarterly.

In 2015, we entered into a senior, unsecured revolving credit agreement with an affiliate of Westlake, as amended in August and November 2017, March 2020 and July 2022 (the "MLP Revolver").

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The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default.

As of March 31, 2023, outstanding borrowings under the MLP Revolver totaled $377.1 million and bore interest at SOFR plus the Applicable Margin and credit spread adjustment, which is accrued in arrears quarterly.

As of June 30, 2023, outstanding borrowings under the MLP Revolver totaled $377.1 million and bore interest at SOFR plus the Applicable Margin and credit spread adjustment, which is accrued in arrears quarterly.

We intend to use the MLP Revolver to purchase additional limited partnership interests in OpCo in the future, in the event OpCo desires to sell such additional interests to us, for other acquisitions and for general corporate purposes.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis