WESTLAKE CHEMICAL PARTNERS LP Overview
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying consolidated financial statements, the notes thereto, and the other financial information appearing elsewhere in this report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See "Cautionary Statement Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" included within this report. We are aDelaware limited partnership formed byWestlake to operate, acquire and develop ethylene production facilities and related assets. OnAugust 4, 2014 , we closed our initial public offering (the "IPO") of 12,937,500 common units. In connection with the IPO, we acquired a 10.6% interest in OpCo and a 100% interest in OpCo GP, which is the general partner of OpCo. OnApril 29, 2015 , we purchased an additional 2.7% newly-issued limited partner interest in OpCo, resulting in an aggregate 13.3% limited partner interest in OpCo effective as ofApril 1, 2015 . OnSeptember 29, 2017 , we completed a secondary public offering of 5,175,000 common units and purchased an additional 5.0% newly-issued limited partner interest in OpCo, resulting in an aggregate 18.3% limited partner interest in OpCo effective as ofJuly 1, 2017 . The 12,686,115 subordinated units of the Partnership, all of which were previously owned byWestlake , were converted into common units of the Partnership onAugust 30, 2017 . OnMarch 29, 2019 , we completed a private placement of 2,940,818 common units and used the net proceeds to purchase an additional 4.5% interest in OpCo, effectiveJanuary 1, 2019 , resulting in us owning an aggregate 22.8% limited partner interest in OpCo. Currently, our sole revenue generating asset is our 22.8% limited partner interest in OpCo, a limited partnership formed byWestlake and us in anticipation of the IPO to own and operate an ethylene production business. We control OpCo through our ownership of its general partner.Westlake retains the remaining 77.2% limited partner interest in OpCo as well as a significant interest in us through its ownership of our general partner, 40.1% of our limited partner units (consisting of 14,122,230 common units) and our incentive distribution rights. OpCo's assets include (1) two ethylene production facilities ("Petro 1" and "Petro 2" and, collectively, "Lake Charles Olefins") atWestlake's Lake Charles, Louisiana site; (2) one ethylene production facility ("Calvert City Olefins") atWestlake's Calvert City, Kentucky site; and (3) a 200-mile common carrier ethylene pipeline (the "Longview Pipeline") that runs fromMont Belvieu, Texas toWestlake's Longview, Texas facility.
How We Generate Revenue
We generate revenue primarily by selling ethylene and the resulting co-products we produce. OpCo andWestlake have entered into an ethylene sales agreement (the "Ethylene Sales Agreement") pursuant to which we generate a substantial majority of our revenue. The Ethylene Sales Agreement is a long-term, fee-based agreement with a minimum purchase commitment and includes variable pricing based on OpCo's actual feedstock and natural gas costs and estimated other costs of producing ethylene (including OpCo's estimated operating costs and a five-year average of OpCo's expected future maintenance capital expenditures and other turnaround expenditures based on OpCo's planned ethylene production capacity for the year), plus a fixed margin per pound of$0.10 less revenue from co-products sales. Pursuant to the Ethylene Sales Agreement,Westlake's obligation to pay for the annual minimum commitment (95% of OpCo's budgeted ethylene production), which is measured on an annual basis, is not reduced for a force majeure event lasting fewer than 45 consecutive days. In the event of a force majeure event, we recognize buyer deficiency fees representing fixed margin and unavoided operating and maintenance capital expenditures and maintenance expenses per pound of volume committed byWestlake during the force majeure event. Payment for the buyer deficiency fee is scheduled to be received by the Partnership after the conclusion of the year.Westlake has an option to take 95% of volumes in excess of the minimum commitment on an annual basis under the Ethylene Sales Agreement if we produce more than our planned production. Under the Ethylene Sales Agreement, the price for the sale of such excess ethylene toWestlake is based on a formula similar to that used for the minimum purchase commitment, with the exception of certain fixed costs. In addition, under the Ethylene Sales Agreement, if production costs billed toWestlake on an annual basis are less than 95% of the actual production costs incurred by OpCo during the contract year, OpCo is entitled to recover the shortfall in such production costs (proportionate to the volume sold toWestlake ) in the subsequent year ("Shortfall"). The Shortfall is generally recognized during the period in which the related operating, maintenance or turnaround activities occur. The Ethylene Sales Agreement provides that, if compliance with any law adopted or modified following our IPO results in OpCo incurring additional costs in excess of$500,000 in any contract year, OpCo is entitled to chargeWestlake a monthly surcharge following efforts to mitigate the effects of such compliance. 31
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We sell ethylene production in excess of volumes sold toWestlake , as well as all associated co-products resulting from the ethylene production, directly to third parties on either a spot or contract basis. Net proceeds (after transportation and other costs) from the sales of associated co-products that result from the production of ethylene purchased byWestlake are netted against the ethylene price charged toWestlake under the Ethylene Sales Agreement, thereby substantially reducing our exposure to fluctuations in the market prices of these co-products. During 2021, all the third-party ethylene and associated co-products sales generated 15.5% of our total revenues. Under the Services and Secondment Agreement, OpCo uses a portion of its production capacity to process purge gas forWestlake . OnAugust 4, 2016 , OpCo andWestlake entered into an amendment to the Ethylene Sales Agreement in order to provide that certain of the pricing components that make up the price for ethylene sold thereunder would be modified to reflect the portion of OpCo's production capacity that is used to processWestlake's purge gas instead of producing ethylene and to clarify that costs specific to the processing ofWestlake's purge gas would be recovered under the Services and Secondment Agreement, and not the Ethylene Sales Agreement.
Please refer to Note 2 to the consolidated financial statements included within this report for more information on the Ethylene Sales Agreement.
How We Source Feedstock
OpCo has entered into a 12-year feedstock supply agreement (the "Feedstock Supply Agreement") withWestlake Petrochemicals LLC , a wholly owned subsidiary ofWestlake , under whichWestlake Petrochemicals LLC supplies OpCo with ethane and other feedstocks that OpCo uses to produce ethylene under the Ethylene Sales Agreement. For its approximately five percent merchant sales, OpCo may purchase the ethane and other feedstocks to produce ethylene and resulting co-products to sell to unrelated third parties fromWestlake Petrochemicals LLC .
Please refer to Note 2 to the consolidated financial statements included within this report for more information on the Feedstock Supply Agreement.
How We Evaluate Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (1) production volumes, (2) operating and maintenance expenses, including turnaround costs, and (3) MLP distributable cash flow and EBITDA. Production Volumes The amount of profit we generate primarily depends on the volumes of ethylene and resulting co-products we are able to produce at Calvert City Olefins and Lake Charles Olefins. AlthoughWestlake has committed to purchasing minimum volumes from us under the Ethylene Sales Agreement, our results of operations are impacted by our ability to:
•produce sufficient volumes of ethylene to meet our commitments under the Ethylene Sales Agreement or recover our estimated costs through the pricing provisions of the Ethylene Sales Agreement;
•contract with third parties for the remaining uncommitted production capacity;
•add or increase capacity at our existing production facilities, or add additional production capacity via organic expansion projects and acquisitions; and
•achieve or exceed the specified yield factors for natural gas, ethane and other feedstock under the Ethylene Sales Agreement.
Operating Expenses, Maintenance Capital Expenditures and Turnaround Costs
Our management seeks to maximize the profitability of our operations by
effectively managing operating expenses, maintenance capital expenditures and
turnaround costs. Our operating expenses are comprised primarily of feedstock
costs and natural gas, labor expenses (including contractor services), utility
costs (other than natural gas) and turnaround and maintenance expenses. With the
exception of feedstock (including natural gas) and utilities-related expenses,
operating expenses generally remain relatively stable across broad ranges of
production volumes but can fluctuate from period to period depending on the
circumstances, particularly maintenance and turnaround activities. Our
maintenance capital expenditures and turnaround costs are comprised primarily of
maintenance of our ethylene production facilities and the amortization of
capitalized turnaround costs. These capital expenditures relate to the
maintenance and integrity of our facilities. We capitalize the costs of major
maintenance activities, or turnarounds, and amortize the costs over the period
until the next planned turnaround of the affected facility.
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Operating expenses, maintenance capital expenditures and turnaround costs are built into the price per pound of ethylene charged toWestlake under the Ethylene Sales Agreement. Because the expenses other than feedstock costs and natural gas are based on forecasted amounts and remain a fixed component of the price per pound of ethylene sold under the Ethylene Sales Agreement for any given 12-month period, our ability to manage operating expenses, maintenance expenditures and turnaround costs may directly affect our profitability and cash flows. The impact on profitability is partially mitigated by the fact that we generally recognize any Shortfall as revenue in the period such costs and expenses are incurred. We seek to manage our operating and maintenance expenses on our ethylene production facilities by scheduling maintenance and turnarounds over time to avoid significant variability in our operating margins and minimize the impact on our cash flows, without compromising our commitment to safety and environmental stewardship. In addition, we reserve cash on an annual basis from what we would otherwise distribute to minimize the impact of turnaround costs in the year of incurrence. The purchase price under the Ethylene Sales Agreement is not designed to cover capital expenditures for expansions.
MLP Distributable Cash Flow and EBITDA
The body of accounting principles generally accepted inthe United States is commonly referred to as "GAAP." For this purpose, a non-GAAP financial measure is generally defined by theSecurities 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 use the non-GAAP measures of MLP distributable cash flow and EBITDA to analyze our performance. 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 toWestlake'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. We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. We use each of MLP distributable cash flow and EBITDA to analyze our performance. Fees for a buyer deficiency and Shortfall are included in net income in the periods in which they are recognized. MLP distributable cash flow and EBITDA are non-GAAP supplemental financial measures 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. 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. Reconciliations for each of MLP distributable cash flow and EBITDA are included in "-Results of Operations" below.
Factors Affecting Our Business
Supply and Demand for Ethylene and Resulting Co-products
We generate a substantial majority of our revenue from the Ethylene Sales Agreement. This contract is intended to promote cash flow stability and minimize our direct exposure to commodity price fluctuations in the following ways: (1) the cost-plus pricing structure of the Ethylene Sales Agreement is expected to generate a fixed margin of$0.10 per pound, adjusting automatically for changes in feedstock costs; and (2)Westlake is committed to purchase 95% of the annual planned output, subject to a maximum commitment of 3.8 billion pounds of ethylene per year, with an option to purchase an additional 95% of actual output in excess of the planned output on a contract year basis. As a result, our direct exposure to commodity price risk is limited to approximately 5% of our total ethylene production, which is that portion sold to third parties, assumingWestlake exercises its option to purchase 95% of the over production, as well as to our co-products sales. 33
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We also have indirect exposure to commodity price fluctuations to the extent such fluctuations affect the ethylene consumption patterns of third-party purchasers. Demand for ethylene exhibits cyclical commodity characteristics as margins earned on ethylene derivative products are influenced by changes in the balance between supply and demand, the resulting operating rates and general economic activity. While we believe we have substantially mitigated our indirect exposure to commodity price fluctuations during the term of the Ethylene Sales Agreement through the minimum commitment and the cost-plus based pricing, our ability to execute our growth strategy in our areas of operation will depend, in part, on the demand for ethylene derivatives in the geographical areas served by our ethylene production facilities.
Significant Developments Affecting Industry Conditions and Our Business
COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the ongoing COVID-19 outbreak a pandemic and recommended containment and mitigation measures worldwide. The pandemic has resulted in widespread adverse impacts on the global economy and on our employees, customers and suppliers. The COVID-19 pandemic has not caused significant disruptions to our business operations and we do not expect the COVID-19 pandemic to cause significant disruptions to our future business operations, primarily due to the fact that 95% of our production is sold toWestlake on a take-or-pay contract.
OpCo's Petro 2 Turnaround
InSeptember 2021 , we commenced our planned major maintenance activities, or turnaround, of OpCo's Petro 2 ethylene unit inLake Charles, Louisiana . The turnaround was originally expected to conclude inNovember 2021 . OnSeptember 27, 2021 , shortly after the turnaround commenced, there was a flash fire at the quench tower of the Petro 2 facility. Several contractors working on the quench tower were injured. Although there was no sustained fire or offsite impact resulting from the incident and the quench tower did not sustain significant damage, due to the subsequent investigation by theOccupational Safety and Health Administration , the duration of the turnaround was extended untilDecember 2021 . There are lawsuits pending in connection with the flash fire at the quench tower during the Petro 2 turnaround. We expect insurance to cover most of the costs associated with these lawsuits.
Force Majeure Events
OpCo declared force majeure events inSeptember 2021 due to the flash fire at the Petro 2 facility, inJune 2021 due to OpCo's Petro 1 facility outage, and inFebruary 2021 due to the severe winter storm. As a result of these force majeure events, the Partnership recognized revenue for buyer deficiency fees of$51.4 million and Shortfall of$58.9 million during 2021, which is classified as a component of net sales. The buyer deficiency fee is measured periodically based upon the lower of the actual production deficiency at period end or the estimated annual production deficiency based upon OpCo's annual anticipated production. These periodic estimates are updated at the end of the year based on actual annual production. The buyer deficiency fee was collected fromWestlake inJanuary 2022 and the Shortfall recognized in 2021 is recoverable during 2022 under the Ethylene Sales Agreement. 34
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Results of Operations
The table below and descriptions that follow represent the consolidated results of operations of the Partnership for the years 2021, 2020 and 2019.
Year Ended December 31,
2021 2020 2019
(in thousands ofdollars, except unit amounts and per unit
data)
Net sales-Westlake$ 1,026,586 $ 888,245 $ 937,625 Net co-products, ethylene and feedstock sales-third parties 188,272 78,425 154,246 Total net sales 1,214,858 966,670 1,091,871 Gross profit 441,706 378,883 379,428 Selling, general and administrative expenses 31,018 25,895 29,278 Income from operations 410,688 352,988 350,150 Other income (expense) Interest expense-Westlake (8,816) (12,038) (19,623) Other income, net 62 733 3,096 Income before income taxes 401,934 341,683 333,623 Provision for income taxes 549 564 728 Net income$ 401,385 $ 341,119 $ 332,895 Less: Net income attributable to noncontrolling interest in OpCo 318,838 274,952 271,914 Net income attributable toWestlake Chemical Partners LP and limited partners' interest in net income$ 82,547 $ 66,167 $ 60,981 Net income attributable toWestlake Chemical Partners LP per limited partner unit (basic and diluted) Common units$ 2.34 $ 1.88 $ 1.77 Weighted average limited partner units outstanding (basic and diluted) Common units-public 21,084,103 21,073,041 20,365,828 Common units-Westlake 14,122,230 14,122,230 14,122,230 MLP distributable cash flow (1)$ 70,057 $ 71,983 $ 73,181 EBITDA (1)$ 519,564 $ 456,875 $ 460,566 Year Ended December 31, 2021 2020 Average Sales Average Sales Price Volume Price Volume Product sales price and volume percentage change from prior year +26.8 % -3.6 % +0.8% -18.6 % Year Ended December 31, 2021 2020 2019 Average industry prices (2) Ethane (cents/lb) 10.4 6.4 7.3 Propane (cents/lb) 24.7 11.0 12.7 Ethylene (cents/lb) (3) 42.9 17.5 18.5
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(1)See above for discussions on non-GAAP financial measures. Reconciliations for each of MLP distributable cash flow and EBITDA are included below.
(2)Industry pricing data was obtained through IHS. We have not independently verified the data.
(3)Represents average North American spot prices of ethylene over the period as reported by IHS.
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Reconciliation of MLP Distributable Cash Flow to Net Income and Net Cash
Provided by Operating Activities
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Net cash provided by operating activities
Loss from disposition of fixed assets (4,198) (1,000) (515)
Changes in operating assets and liabilities
and other (2,856) (31,278) (117,397)
Net Income 401,385 341,119 332,895
Add:Depreciation, amortization and
disposition of property, plant and
equipment 113,032 104,154 107,835
Mark-to-market adjustment loss (gain) on
derivative contracts - (1,340) 1,301
Less:
Contribution to turnaround reserves (80,090) (39,937) (15,630)
Maintenance capital expenditures (87,783) (37,343) (39,940)
Incentive distribution rights - - -
Distributable cash flow attributable to
noncontrolling interest in OpCo (276,487) (294,670) (313,280)
MLP distributable cash flow $ 70,057 $
71,983
Reconciliation of EBITDA to Net Income, Income from Operations andNet Cash Provided by Operating Activities Year Ended December 31, 2021 2020 2019 (dollars in thousands)
Net cash provided by operating activities
Loss from disposition of fixed assets (4,198) (1,000) (515)
Changes in operating assets and liabilities
and other (2,856) (31,278) (117,397)
Net income 401,385 341,119 332,895
Less:
Other income, net 62 733 3,096
Interest expense (8,816) (12,038) (19,623)
Provision for income taxes (549) (564) (728)
Income from operations 410,688 352,988 350,150
Add:
Depreciation and amortization 108,814 103,154 107,320
Other income, net 62 733 3,096
EBITDA $ 519,564 $ 456,875 $ 460,566
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Summary
For the year endedDecember 31, 2021 , net income was$401.4 million on net sales of$1,214.9 million . This represents an increase in net income of$60.3 million as compared to net income of$341.1 million on net sales of$966.7 million for the year endedDecember 31, 2020 . Net income attributable to the Partnership in 2021 was$82.5 million as compared to$66.2 million in 2020, an increase of$16.3 million . Income from operations was$410.7 million for 2021, as compared to$353.0 million for 2020. The increase in income from operations, as well as net income and net income attributable to the Partnership, was primarily due to the higher sales price for ethylene sold to third parties and an increase in the buyer deficiency fee and Shortfall revenue in 2021 compared to 2020. The buyer deficiency fee and Shortfall revenue in 2021 was$110.3 million as compared to$69.6 million in 2020. These increases were slightly offset by lower sales volumes toWestlake due to OpCo's Petro 2 turnaround and force majeure events that resulted in lower production as well as higher feedstock and conversion costs. Net sales for 2021 increased by$248.2 million as compared to 2020 mainly due to higher sales prices to third parties andWestlake per the terms of the Ethylene Sales Agreement and the buyer deficiency fee and Shortfall recognized, partially offset by lower sales volumes toWestlake during the year endedDecember 31, 2021 .
2021 Compared with 2020
Net Sales . Net sales increased by$248.2 million , or 25.7%, to$1,214.9 million in 2021 from$966.7 million in 2020. The increase in net sales in 2021 was primarily due to the higher sales price to third parties andWestlake per the terms of the Ethylene Sales Agreement and the buyer deficiency fee and Shortfall of$110.3 million recognized in 2021 as compared to$69.6 million in 2020, partially offset by lower production during the year, mainly due to the force majeure events occurring in 2021. The average sales price in 2021 contributed to a 26.8% increase in net sales, compared to 2020. The lower sales volume during 2021 contributed to a decrease in net sales of 3.6% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The decrease in sales volume during 2021 was primarily due to OpCo's Petro 2 Turnaround and the force majeure events in 2021. Gross Profit. Gross profit was$441.7 million in 2021, as compared to gross profit of$378.9 million in 2020. The gross profit margin was 36.4% in 2021 as compared to 39.2% in 2020. The increase in gross profit was primarily due to the higher sales price for ethylene sold to third parties and an increase in the buyer deficiency fee and Shortfall revenue in 2021 compared to 2020. The decreased 2021 gross profit margin was primarily due to increased feedstock and conversion costs as compared to 2020. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by$5.1 million , or 19.7%, to$31.0 million in 2021 from$25.9 million in 2020. The increase in 2021, as compared to 2020, was mainly attributable to higher service costs. Interest Expense. Interest expense decreased by$3.2 million to$8.8 million in 2021 from$12.0 million in 2020, largely due to a lower average interest rate on debt. Other Income, net. Other income, net decreased by$0.6 million to$0.1 million in 2021 from$0.7 million in 2020, primarily due to a decrease in interest income earned under the Investment Management Agreement as a result of lower average interest rates.
Provision for Income Taxes. Provision for income taxes was
MLP Distributable Cash Flow. MLP distributable cash flow decreased by$1.9 million to$70.1 million in 2021 from$72.0 million in 2020. The decrease in MLP distributable cash flow was primarily a result of lower production, increased turnaround reserves and higher maintenance expense in 2021 compared to 2020, partially offset by the buyer deficiency fee and Shortfall of$110.3 million recognized in 2021 as compared to$69.6 million in 2020 and lower interest expense during the year. EBITDA. EBITDA increased by$62.7 million to$519.6 million in 2021 from 2020 EBITDA of$456.9 million . The increased EBITDA, as compared to the prior year, was primarily due to the buyer deficiency fee and Shortfall of$110.3 million recognized during 2021 compared to the buyer deficiency of$69.6 million recognized in 2020, partially offset by lower sales volumes as a result of lower production and higher feedstock and conversion costs. 37
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2020 Compared with 2019
Net Sales . Net sales decreased by$125.2 million , or 11.5%, to$966.7 million in 2020 from$1,091.9 million in 2019. The decrease in net sales in 2020 was primarily due to lower production during the year, mainly due to the force majeure events and lower sales prices to third parties, partially offset by the buyer deficiency fee of$69.6 million recognized in 2020 and higher sales price toWestlake per the terms of the Ethylene Sales Agreement in 2020. The lower sales volume during 2020 contributed to a decrease in net sales of 18.6% for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease in sales volume during 2020 was primarily due to the force majeure events at our LakeCharles Petro 1 and Petro 2 units. The average sales price in 2020 contributed to a 0.8% increase in net sales, compared to 2019, which was mainly due to higher sales prices toWestlake per the terms of the Ethylene Sales Agreement, partially offset by lower third party sales prices. Gross Profit. Gross profit was$378.9 million in 2020, as compared to gross profit of$379.4 million in 2019. The gross profit margin was 39.2% in 2020 as compared to 34.7% in 2019. The increased 2020 gross profit margin was due to higher earnings on ethylene sold toWestlake and the buyer deficiency fee of$69.6 million recognized during the year, partially offset by lower sales volumes resulting from lower production at the LakeCharles Petro I and Petro 2 units compared to 2019. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by$3.4 million , or 11.6%, to$25.9 million in 2020 from$29.3 million in 2019. The decrease in 2020, as compared to 2019, was mainly attributable to lower service cost. Interest Expense. Interest expense decreased by$7.6 million to$12.0 million in 2020 from$19.6 million in 2019, largely due to a lower interest rate on debt as a result of a decrease in the London Interbank Offered Rate ("LIBOR"). Other Income, net. Other income, net decreased by$2.4 million to$0.7 million in 2020 from$3.1 million in 2019, primarily due to a decrease in interest income earned under the Investment Management Agreement as a result of lower average interest rates.
Provision for Income Taxes. Provision for income taxes was
MLP Distributable Cash Flow. MLP distributable cash flow decreased by$1.2 million to$72.0 million in 2020 from$73.2 million in 2019. The decrease in MLP distributable cash flow was primarily a result of lower production, increased turnaround reserves and higher maintenance expense, partially offset by the buyer deficiency of$69.6 million recognized in 2020 and lower interest expense during the year. EBITDA. EBITDA decreased by$3.7 million to$456.9 million in 2020 from 2019 EBITDA of$460.6 million . The decreased EBITDA, as compared to the prior year, was primarily due to lower sales volumes as a result of lower production and higher maintenance expense, partially offset by the buyer deficiency fee of$69.6 million recognized during 2020 and lower selling, general and administrative expenses. Cash Flows Operating Activities Operating activities provided cash of$408.4 million in 2021 as compared to cash provided by operating activities of$373.4 million in 2020. The$35.0 million increase in cash flows from operating activities was mainly due to increase in net income and in cash provided by working capital, partially offset by OpCo's Petro 2 facility turnaround activities during 2021 as compared to 2020. Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable-Westlake , accounts receivable, net-third parties, inventories, prepaid expenses and other current assets less accounts payable and accrued liabilities and other liabilities, provided cash of$25.6 million in 2021 as compared to$67.9 million of cash used in 2020, resulting in an overall favorable change of$93.5 million . This change in 2021 as compared to 2020 was due to changes in receivable due fromWestlake resulting from the buyer deficiency fee and Shortfall recognized in 2021 as compared to 2020 and favorable changes in third party accounts payable and accrued liabilities due to the timing of payments related to the turnaround costs and capital expenditures. These favorable changes were partially offset by an unfavorable change related to turnaround costs incurred during 2021. 38
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Operating activities provided cash of$373.4 million in 2020 as compared to cash provided by operating activities of$450.8 million in 2019. The$77.4 million decrease in cash flows from operating activities was mainly due to an increase in use of cash in working capital during 2020 as compared to 2019. Changes in components of working capital, which we define for the purposes of this cash flow discussion as accounts receivable-Westlake , accounts receivable, net-third parties, inventories, prepaid expenses and other current assets less accounts payable and accrued liabilities and other liabilities, used cash of$67.9 million in 2020 as compared to$11.7 million of cash provided in 2019, resulting in an overall unfavorable change of$79.6 million . This change was due to an unfavorable change inWestlake accounts receivable in 2020 as compared to 2019, primarily due to the buyer deficiency fee recognized in 2020.
Investing Activities
Net cash used in investing activities during 2021 was$64.3 million as compared to net cash provided by investing activities of$2.0 million in 2020, mainly due to increased additions to property, plant, and equipment, partially offset by maturities of investments under the Investment Management Agreement in 2021, as compared to 2020. During 2021, we invested$276.0 million withWestlake , and$293.0 million of such investments matured. Capital expenditures were$81.2 million in 2021 as compared to$37.0 million in 2020. The higher capital expenditure in 2021 was primarily associated with OpCo's Petro 2 turnaround. Remaining capital expenditures during 2021 and 2020 were related to projects to improve production capacity or reduce costs, maintenance and safety and environmental projects at our facilities. Net cash provided by investing activities during 2020 was$2.0 million as compared to net cash used for investing activities of$57.7 million in 2019, mainly due to maturities of investments under the Investment Management Agreement and a decrease in additions to property, plant and equipment in 2020, as compared to 2019. During 2020, we invested$349.0 million withWestlake , and$388.0 million of such investments matured. Capital expenditures were$37.0 million in 2020 as compared to$43.7 million in 2019. Capital expenditures during 2020 and 2019 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 during 2021 was$344.2 million as compared to net cash used for financing activities of$378.2 million in 2020. The cash outflows during 2021 were related to distributions of$277.9 million toWestlake and of$66.4 million to other unitholders by the Partnership. Net cash used for financing activities during 2020 was$378.2 million as compared to net cash used for financing activities of$392.9 million in 2019. The cash outflows during 2020 were related to distributions of$311.8 million toWestlake and of$66.4 million to other unitholders by the Partnership.
Liquidity and Capital Resources
Liquidity and Financing Arrangements
OnMarch 29, 2019 , we completed the private placement of 2,940,818 common units at a price of$21.40 per unit. Net proceeds from the issuance of these common units were approximately$62.7 million . Pursuant to the terms of the ATM Agreement, entered inOctober 2018 and amended inFebruary 2020 , among the Partnership and various investment banks, the Partnership may offer and sell the Partnership's common units from time to time to or through the Managers, as the Partnership's sales agents or as principals, having an aggregate offering amount of up to$50.0 million (the "ATM Program"). The Partnership intends to use the net proceeds of sales of the common units, if any, for general partnership purposes, including the funding of potential drop-downs and other acquisitions. No common units had been issued under the ATM Program as ofDecember 31, 2021 . 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. To the extent we do not generate sufficient cash flow to fund capital expenditures, we expect to fund them primarily from external sources, including borrowing directly fromWestlake , as well as future issuances of equity interests or debt. The Partnership maintains separate bank accounts, butWestlake continues to provide treasury services on our behalf under the Services and Secondment Agreement. Our sources of liquidity include cash generated from operations, the OpCo Revolver, the MLP Revolver and, if necessary and possible under then current market conditions, the issuance of additional equity interests or debt. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.Westlake may also provide other direct and indirect financing to us from time to time, although it is not obligated to do so. 39
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In order to fund non-annual turnaround expenditures, we cause OpCo to reserve an amount for turnaround costs during each twelve-month period designed to cover future turnaround activities. Each of OpCo's ethylene production facilities requires turnaround maintenance approximately every five years. By reserving additional cash annually, we intend to reduce the variability in OpCo's cash flow.Westlake's purchase price for ethylene purchased under the Ethylene Sales Agreement includes a component (adjusted annually) designed to cover, over the long term, substantially all of OpCo's turnaround expenditures. Our cash is generated from cash distributions from OpCo. OpCo is a restricted subsidiary under certain indentures governingWestlake's senior notes, and these restrictions limit OpCo's ability to incur additional debt, among other things.Westlake's credit facility and various indentures do not prevent OpCo from making distributions to us. We, OpCo andWestlake are parties to an Investment Management Agreement that authorizesWestlake to invest the Partnership's and OpCo's excess cash withWestlake for a term of up to a maximum of nine months. Per the terms of the Investment Management Agreement, cash invested withWestlake earns a market return plus five basis points andWestlake provides daily availability of the invested cash to meet any liquidity needs of the Partnership or OpCo. OnJanuary 24, 2022 , the board of directors ofWestlake Chemical Partners GP LLC , our general partner, approved a quarterly distribution of$0.4714 per unit payable onFebruary 17, 2022 to unitholders of record onFebruary 3, 2022 , which equates to approximately$16.6 million per quarter, or approximately$66.4 million per year in aggregate, based on the number of common units outstanding onDecember 31, 2021 . 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.
Capital Expenditures
Westlake has historically funded expansion capital expenditures related to Lake Charles Olefins and Calvert City Olefins. No such funding was required by OpCo during 2021 or 2020. We expect thatWestlake will loan additional cash to OpCo to fund its expansion capital expenditures in the future, butWestlake is under no obligation to do so. Cash and Cash Equivalents As ofDecember 31, 2021 , our cash and cash equivalents totaled$17.1 million . In addition, we have cash invested under the Investment Management Agreement and a revolving credit facility withWestlake available to supplement cash on hand, if needed, as described under "Indebtedness" below. As described above, we, OpCo andWestlake are parties to an Investment Management Agreement that authorizesWestlake to invest the Partnership's and OpCo's excess cash withWestlake for a term of up to a maximum of nine months. The Partnership had$106.2 million of cash invested under the Investment Management Agreement atDecember 31, 2021 .
Indebtedness
OpCo Revolver
In connection with the IPO, OpCo entered into a$600.0 million revolving credit facility withWestlake , as amended in August andDecember 2017 andMarch 2020 (the "OpCo Revolver") that may be used to fund growth projects and working capital needs. OnApril 30, 2019 , OpCo repaid$201.4 million of borrowings under the OpCo Revolver. As ofDecember 31, 2021 , outstanding borrowings under the OpCo Revolver totaled$22.6 million and bore interest at the London Interbank Offered Rate ("LIBOR") rate plus 2.0%, which is accrued in arrears quarterly. OnSeptember 25, 2018 , the OpCo Revolver was amended to extend the scheduled maturity date fromAugust 4, 2019 toSeptember 25, 2023 and to revise the applicable margin from 3% to 2%. 40
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MLP Revolver
In 2015, we entered into a senior, unsecured revolving credit agreement with an affiliate ofWestlake (the "MLP Revolver"). The MLP Revolver has a borrowing capacity of$600.0 million . OnMarch 29, 2019 , the Partnership borrowed$123.5 million under the MLP Revolver to partially fund the purchase of an additional 4.5% interest in OpCo. OnMarch 19, 2020 , the Partnership entered into an amendment to the MLP Revolver, to extend the maturity date toMarch 19, 2023 and add a phase-out provision for LIBOR, which is to be replaced by an alternate benchmark rate. Borrowings under the MLP Revolver bear interest at a variable rate of either (a) LIBOR plus 2.0% or, if LIBOR is no longer available, (b) Alternate Base Rate plus 1.0%. The MLP Revolver provides that we may pay all or a portion of the interest on any borrowings in kind, in which case any such amounts would be added to the principal amount of the loan. The MLP Revolver requires that we maintain a consolidated leverage ratio of either (1) during any one-year period following certain types of acquisitions (including acquisitions of additional interests in OpCo), 5.50:1.00 or less, or (2) during any other period, 4.50:1.00 or less. The MLP Revolver also contains certain other customary covenants. The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default. As ofDecember 31, 2021 , the outstanding borrowings under the MLP Revolver totaled$377.1 million . 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.
Contractual Obligations and Commercial Commitments
The Partnership's material cash requirements for contractual obligations and commercial commitments in the near term (next 12 months) and the long-term period (2023 and thereafter) include repayment of long-term debt, interest payments and purchase obligations.
Debt Obligations and Interest Payments. As ofDecember 31, 2021 , we had$8.5 million of debt related interest expense due within the near term, and debt obligations of$399.7 million and related interest expense of$2.1 million due over the long-term period, respectively. All$399.7 million of our outstanding debt matures in 2023. See Note 8, "Long-Term Debt," in the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for further information on our debt obligations and the expected timing of future principal and interest payments. Purchase Obligations. Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding and that specify all significant terms, including a minimum quantity and price. As ofDecember 31, 2021 , we had$14.7 million of enforceable and legally binding purchase commitments due within the near term, and none due over the long-term period. Additionally, we are party to various agreements to purchase goods and services, including the Services and Secondment Agreement, in the ordinary course of our business, as well as various agreements related to our capital projects.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the accompanying consolidated financial statements and related notes and believe those policies are reasonable and appropriate. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our more critical accounting estimates include those related to long-lived assets, fair value estimates, goodwill impairment and environmental and legal obligations. Inherent in such estimates are certain key assumptions. We periodically update the estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. We believe the following to be our most critical accounting estimates required for the preparation of our financial statements. Long-Lived Assets. Key estimates related to long-lived assets include useful lives, recoverability of carrying values and existence of any retirement obligations. Such estimates could be significantly modified. The carrying values of long-lived assets could be impaired by significant changes or projected changes in supply and demand fundamentals (which would have a negative impact on operating rates or margins), new technological developments, new competitors with significant raw material or other cost advantages, adverse changes associated with theU.S. and world economies, the cyclical nature of the chemical and refining industries and uncertainties associated with governmental actions. 41
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We evaluate long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including when negative conditions such as significant current or projected operating losses exist. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our businesses. Actual impairment losses incurred could vary significantly from amounts estimated. Long-lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Additionally, future events could cause us to conclude that impairment indicators exist and that associated long-lived assets of our businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. The estimated useful lives of long-lived assets range from three to 40 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled$108.8 million ,$103.2 million and$107.3 million in 2021, 2020 and 2019, respectively. If the useful lives of the assets were found to be shorter than originally estimated, depreciation or amortization charges would be accelerated. We defer the costs of planned major maintenance activities, or turnarounds, and amortize the costs over the period until the next planned turnaround of the affected unit. Total costs deferred on turnarounds were$131.2 million ,$3.7 million and$1.2 million in 2021, 2020 and 2019, respectively. Amortization in 2021, 2020 and 2019 of previously deferred turnaround costs was$16.5 million ,$11.8 million and$17.3 million , respectively. As ofDecember 31, 2021 , deferred turnaround costs, net of accumulated amortization, totaled$146.9 million . Expensing turnaround costs as incurred would likely result in greater variability of our quarterly operating results and would adversely affect our financial position and results of operations.
Additional information concerning long-lived assets and related depreciation and amortization appears in Notes 5 and 7 to the audited consolidated financial statements included within this report.
Fair Value Estimates. We develop estimates of fair value to allocate the purchase price paid to acquire a business to the assets acquired and liabilities assumed in an acquisition, to assess impairment of long-lived assets and goodwill and to record derivative instruments. We use all available information to make these fair value determinations, including the engagement of third-party consultants. We record all derivative instruments at fair value. The fair value of the financial instruments is estimated using quoted market prices in active markets and observable market-based inputs or unobservable inputs that are corroborated by market data when active markets are not available or unobservable inputs that are not corroborated by market data. We settled all derivatives in 2020 and no new derivatives were entered in 2021, however, we may enter into derivative arrangements in the future.Goodwill impairment.Goodwill is evaluated for impairment, or when events or changes in circumstances indicate the fair value of a reporting unit with goodwill has been reduced below its carrying value, and otherwise at least annually. AtDecember 31, 2021 , recorded goodwill was$5.8 million , all of which was associated with the acquisition of the Longview Pipeline as part of the past acquisition ofWestlake's Longview production facilities. We perform our annual impairment assessment in October. We may elect to perform an optional qualitative assessment to determine whether a quantitative impairment analysis is required. The qualitative assessment considers factors such as macroeconomic conditions, industry and market considerations, cost factors related to raw materials and labor, current and projected financial performance, changes in management or strategy, and market capitalization. Alternatively, we may unconditionally elect to bypass the qualitative assessment and perform a quantitative goodwill impairment assessment in any period. Significant assumptions used in the discounted cash flow projection impairment assessment for goodwill include future sales volumes based on production capacities. The future cash flows are discounted to present value using a discount rate. The significant assumptions used in determining the fair value of the reporting unit using the market value methodology include the determination of appropriate market comparables and the estimated multiples of EBITDA a willing buyer is likely to pay. We elected to perform the quantitative assessment during 2021, and such assessment did not indicate impairment of the goodwill. Under the discounted cash flow methodology, even if the fair value of OpCo decreased by 10%, the carrying value of OpCo would not exceed its fair value. Environmental and Legal Obligations. We consult with various professionals to assist us in making estimates relating to environmental costs and legal proceedings. We accrue an expense when we determine that it is probable that a liability has been incurred and the amount is reasonably estimable. While we believe that the amounts recorded in the accompanying consolidated financial statements related to these contingencies are based on the best estimates and judgments available, the actual outcomes could differ from our estimates. Additional information about certain legal proceedings and environmental matters appears in "Item 1. Business-Environmental" and in Note 16 to the consolidated financial statements included within this report. 42
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The Partnership has conditional asset retirement obligations for the removal and disposal of hazardous materials and the remediation of the cause of any such release from certain of the Partnership's manufacturing facilities. However, no asset retirement obligations have been recognized because the fair value of the conditional legal obligation cannot be measured due to the indeterminate settlement date of the obligation. Settlement of these conditional asset retirement obligations is not expected to have a material adverse effect on the Partnership's financial condition, results of operations or cash flows in any individual reporting period.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements included within this report for a full description of recent accounting pronouncements, including expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
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