WESTLAKE CHEMICAL PARTNERS LP This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the accompanying consolidated financial statements and the notes thereto and the consolidated financial statements and notes thereto included inWestlake Chemical Partners LP's annual report on Form 10-K for the fiscal year endedDecember 31, 2021 (the "2021 Form 10-K"), as filed with theSEC onMarch 2, 2022 . Unless otherwise indicated, references in this report to "we," "our," "us" or like terms, refer toWestlake Chemical Partners LP (the "Partnership"),Westlake Chemical OpCo LP ("OpCo") andWestlake Chemical OpCo GP LLC ("OpCo GP"). References to "Westlake" refer toWestlake Corporation (formerly known asWestlake Chemical Corporation ) and its consolidated subsidiaries other than the Partnership, OpCo GP and OpCo. The following discussion contains forward-looking statements. Please read "Forward-Looking Statements" for a discussion of limitations inherent in such statements. Partnership Overview We are aDelaware limited partnership formed by Westlake 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, effectiveApril 1, 2015 . The 12,686,115 subordinated units of the Partnership, all of which were previously owned by Westlake, were converted into common units of the Partnership onAugust 30, 2017 . 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, effectiveJuly 1, 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 by Westlake 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") at Westlake'sLake Charles, Louisiana site; (2) one ethylene production facility ("Calvert City Olefins") at Westlake'sCalvert City, Kentucky site; and (3) a 200-mile common carrier ethylene pipeline (the "Longview Pipeline") that runs fromMont Belvieu, Texas to Westlake'sLongview, Texas facility.
How We Generate Revenue
We generate revenue primarily by selling ethylene and the resulting co-products we produce. OpCo and Westlake 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 by Westlake during the force majeure period. In the event Westlake purchases less than its annual commitment, we recognize buyer deficiency fees representing fixed margin and all expenses and expenditures incurred per pound of volume committed but not taken by Westlake. 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 to Westlake 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 to Westlake 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 to Westlake) in the subsequent year ("Shortfall"). The Shortfall is generally recognized during the period in which the related operating, maintenance or turnaround activities occur. 16
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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. Operating expenses, maintenance capital expenditures and turnaround costs are built into the price per pound of ethylene charged to Westlake 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 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. 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 the "Results of Operations" section below. 17
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Recent Developments
OnJuly 12, 2022 , OpCo entered into the Second Amendment (the "OpCo Revolver Amendment") to the Amended and Restated Senior Unsecured Revolving Credit Agreement (as so amended, the "OpCo Revolver"). The OpCo Revolver Amendment, among other things, extended the maturity date of the OpCo Revolver toJuly 12, 2027 and provided for the replacement of the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate, as administered by theFederal Reserve Bank of New York ("SOFR"). Borrowings under the OpCo Revolver now bear interest at a variable rate of either (a) SOFR plus the Applicable Margin plus a 0.10% credit spread adjustment or, if SOFR is no longer available, (b) the Alternate Base Rate plus the Applicable Margin minus 1.0%. The Applicable Margin under the OpCo Revolver is 1.75%. OnJuly 12, 2022 , the Partnership entered into the Fourth Amendment (the "MLP Revolver Amendment") to the Senior Unsecured Revolving Credit Agreement (the "MLP Revolver"). The MLP Revolver Amendment, among other things, extended the maturity date of the MLP Revolver toJuly 12, 2027 and provided for the replacement of LIBOR with SOFR. Borrowings under the MLP Revolver now bear interest at a variable rate of either (a) SOFR plus the Applicable Margin plus a 0.10% credit spread adjustment or, if SOFR is no longer available, (b) the Alternate Base Rate plus the Applicable Margin minus 1.0%. The Applicable Margin under the MLP Revolver varies between 1.75% and 2.75%, depending on the Partnership's Consolidated Leverage Ratio. 18
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Results of Operations
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Revenue
Net sales-Westlake $ 364,273 $ 247,887 $ 1,020,042 $ 708,646
Net co-products, ethylene and other
sales-third parties 50,850 46,079 206,266 175,756
Total net sales 415,123 293,966 1,226,308 884,402
Cost of sales 324,629 218,038 947,073 589,746
Gross profit 90,494 75,928 279,235 294,656
Selling, general and administrative expenses 8,678 7,792 26,824 24,734
Income from operations 81,816 68,136 252,411 269,922
Other income (expense)
Interest expense-Westlake (3,645) (2,190) (8,703) (6,650)
Other income, net 618 24 683 52
Income before income taxes 78,789 65,970 244,391 263,324
Income tax provision (benefit) 484 (105) 822 333
Net income 78,305 66,075 243,569 262,991
Less: Net income attributable to
noncontrolling interest in OpCo 63,548 53,285 196,180 209,956
Net income attributable to Westlake Chemical
Partners LP $ 14,757 $ 12,790 $ 47,389 $ 53,035
MLP distributable cash flow (1) $ 16,734 $ 12,977 $ 55,609 $ 54,760
EBITDA (2) $ 111,825 $ 94,746 $ 344,776 $ 352,804
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(1) See "Reconciliation of MLP Distributable Cash Flow to Net Income and Net Cash Provided by Operating Activities" below. (2) See "Reconciliation of EBITDA to Net Income, Income from Operations and Net Cash Provided by Operating Activities" below.
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Average Average
Sales Price Volume Sales Price Volume
Product sales prices and volume percentage
change from prior-year period +24.5 % +13.4 % +28.4 % +12.1 %
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2022
Domestic US prices percentage change from prior-year period for fuel cost and feedstock
Fuel cost (Natural Gas) +102.8 % +107.1 %
Feedstock (Ethane) +58.0 % +81.7 %
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Reconciliation of MLP Distributable Cash Flow to Net Income and Net Cash Provided by Operating Activities
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Net cash provided by operating activities $ 115,495 $ 99,459 $ 341,162 $ 386,577
Loss from disposition of property, plant
and equipment (958) (372) (4,388) (1,763)
Changes in operating assets and liabilities
and other (36,232) (33,012) (93,205) (121,823)
Net income 78,305 66,075 243,569 262,991
Add:
Depreciation, amortization and disposition
of property, plant and equipment 30,349 26,958 96,070 84,590
Less:
Contribution to turnaround reserves (7,323) (10,795) (21,811) (35,590) Maintenance capital expenditures (14,348) (15,346) (38,172) (41,433) Distributable cash flow attributable to noncontrolling interest in OpCo (70,249) (53,915) (224,047) (215,798) MLP distributable cash flow$ 16,734 $ 12,977 $ 55,609 $ 54,760
Reconciliation of EBITDA to Net Income, Income from Operations and Net Cash Provided by Operating Activities
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Net cash provided by operating activities $ 115,495 $ 99,459 $ 341,162 $ 386,577
Loss from disposition of property, plant
and equipment (958) (372) (4,388) (1,763)
Changes in operating assets and
liabilities and other (36,232) (33,012) (93,205) (121,823)
Net income 78,305 66,075 243,569 262,991
Less:
Other income, net 618 24 683 52
Interest expense (3,645) (2,190) (8,703) (6,650)
Income tax benefit (provision) (484) 105 (822) (333)
Income from operations 81,816 68,136 252,411 269,922
Add:
Depreciation and amortization 29,391 26,586 91,682 82,830 Other income, net 618 24 683 52 EBITDA$ 111,825 $ 94,746 $ 344,776 $ 352,804 20
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Summary
For the quarter endedSeptember 30, 2022 , net income was$78.3 million on net sales of$415.1 million . This represents an increase in net income of$12.2 million as compared to net income of$66.1 million on net sales of$294.0 million for the quarter endedSeptember 30, 2021 . Net income attributable to the Partnership for the third quarter of 2022 was$14.8 million as compared to$12.8 million for the third quarter of 2021, an increase of$2.0 million . Income from operations was$81.8 million for the third quarter of 2022 as compared to$68.1 million for the third quarter of 2021. Net income, net income attributable to the Partnership and operating income for the third quarter of 2022 as compared to the third quarter of 2021 were higher primarily due to higher ethylene sales prices and volumes to Westlake per the terms of the Ethylene Sales Agreement, higher co-products sales prices and volumes, and a buyer deficiency fee of$13.9 million recognized during the third quarter of 2022 resulting from lower planned ethylene offtake by Westlake, partially offset by higher ethane feedstock costs and natural gas prices. Net sales for the third quarter of 2022 increased by$121.1 million as compared to net sales for the third quarter of 2021, mainly due to higher production during the third quarter of 2022 following the Petro 2 turnaround activities that occurred in the third quarter of 2021, resulting in higher sales volumes for co-products and ethylene sold to Westlake, higher ethylene sales prices to Westlake, and the$13.9 million buyer deficiency fee recognized during the third quarter of 2022. For the nine months endedSeptember 30, 2022 , net income was$243.6 million on net sales of$1,226.3 million . This represents a decrease in net income of$19.4 million as compared to net income of$263.0 million on net sales of$884.4 million for the nine months endedSeptember 30, 2021 . Net income attributable to the Partnership for the nine months endedSeptember 30, 2022 was$47.4 million as compared to$53.0 million for the nine months endedSeptember 30, 2021 , a decrease of$5.6 million . Income from operations was$252.4 million for the nine months endedSeptember 30, 2022 as compared to$269.9 million for the nine months endedSeptember 30, 2021 . Net income, net income attributable to the Partnership and operating income for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 were lower primarily due to increased ethane feedstock costs and natural gas prices and lower ethylene sales prices and volumes to third parties, partially offset by higher ethylene sales prices and volumes to Westlake per the terms of the Ethylene Sales Agreement and higher co-products sales prices and volumes. A buyer deficiency fee of$13.9 million was recognized in the nine months endedSeptember 30, 2022 as compared to a buyer deficiency and Shortfall of$21.5 million in the nine months endedSeptember 30, 2021 . Net sales for the nine months endedSeptember 30, 2022 increased by$341.9 million as compared to net sales for the nine months endedSeptember 30, 2021 , mainly due to higher co-products sales prices and volumes and higher ethylene sales prices and volumes to Westlake per the terms of the Ethylene Sales Agreement, partially offset by lower ethylene sales prices and volumes to third parties and the larger buyer deficiency fee and Shortfall recognized during the nine months endedSeptember 30, 2021 as compared to the buyer deficiency fee recognized during the nine months endedSeptember 30, 2022 .
RESULTS OF OPERATIONS
Third Quarter 2022 Compared with Third Quarter 2021
Net Sales . Total net sales increased by$121.1 million , or 41.2%, to$415.1 million in the third quarter of 2022 from$294.0 million in the third quarter of 2021. The increase in net sales in the third quarter of 2022 was primarily due to higher sales prices and volumes for ethylene sold to Westlake and co-products driven by increased production during the third quarter of 2022 compared to the third quarter of 2021 due to the Petro 2 turnaround activities that occurred in the third quarter of 2021 and the buyer deficiency fee recognized during the third quarter of 2022. The average sales price in the third quarter of 2022 increased by 24.5%, primarily due to higher ethylene sales prices to Westlake and co-products sales prices. The average sales volume in the third quarter of 2022 increased by 13.4%, primarily due to higher production resulting in increased sales volumes to Westlake and increased co-products sales volumes as compared to the third quarter of 2021. Gross Profit. Gross profit increased to$90.5 million in the third quarter of 2022 from$75.9 million in the third quarter of 2021. The gross profit margin in the third quarter of 2022 was 21.8%, as compared to 25.8% for the third quarter of 2021. The increase in gross profit was primarily due to higher ethylene sales prices and volumes sold to Westlake and higher co-products sales prices and volumes in the third quarter of 2022 compared to the third quarter of 2021, partially offset by higher ethane feedstock costs and natural gas prices. The third quarter 2022 gross profit margin was lower than the third quarter of 2021 mainly due to higher ethane feedstock costs and natural gas prices, partially offset by higher sales prices and volumes for co-products and ethylene sold to Westlake in the third quarter of 2022. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by$0.9 million , or 11.5%, to$8.7 million in the third quarter of 2022 as compared to$7.8 million in the third quarter of 2021. The increase in the third quarter of 2022 was mainly attributable to an increase in the provision for doubtful accounts as compared to the third quarter of 2021. 21
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Interest Expense. Interest expense of$3.6 million in the third quarter of 2022 increased from$2.2 million in the third quarter 2021 due to a higher average interest rate on debt compared to the third quarter of 2021. MLP Distributable Cash Flow. MLP distributable cash flow increased by$3.7 million to$16.7 million in the third quarter of 2022 from$13.0 million in the third quarter of 2021. The increase in the third quarter of 2022, as compared to the prior-year period, was primarily attributable to increased earnings at OpCo, as well as decreased turnaround reserves and maintenance expense. EBITDA. EBITDA increased by$17.1 million to$111.8 million in the third quarter of 2022 from$94.7 million in the third quarter of 2021. The increase was primarily due to higher ethylene sales prices and volumes sold to Westlake, higher co-products sales prices and volumes and the buyer deficiency fee recognized during the third quarter of 2022, partially offset by higher ethane feedstock costs and natural gas prices.
Nine Months Ended
Net Sales . Total net sales increased by$341.9 million , or 38.7%, to$1,226.3 million in the nine months endedSeptember 30, 2022 from$884.4 million in the nine months endedSeptember 30, 2021 . The increase in net sales in the nine months endedSeptember 30, 2022 was primarily due to higher co-products sales prices and volumes and higher ethylene sales prices and volumes to Westlake, partially offset by lower ethylene sales prices and volumes to third parties. In addition, the buyer deficiency fee of$13.9 million during the nine months endedSeptember 30, 2022 was lower than the buyer deficiency fee and Shortfall of$21.5 million recognized during the nine months endedSeptember 30, 2021 . The average sales price in the nine months endedSeptember 30, 2022 increased by 28.4% compared to the nine months endedSeptember 30, 2021 , primarily due to higher co-products and ethylene sales prices to Westlake, partially offset by lower ethylene sales prices to third parties. The average sales volume increased by 12.1% in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase in sales volumes for the nine months endedSeptember 30, 2022 was primarily due to higher production resulting in increased co-products and ethylene sales volumes to Westlake, partially offset by lower ethylene sales volumes to third parties. Gross Profit. Gross profit decreased to$279.2 million for the nine months endedSeptember 30, 2022 from$294.7 million for the nine months endedSeptember 30, 2021 . The gross profit margin in the nine months endedSeptember 30, 2022 was 22.8%, as compared to 33.3% for the nine months endedSeptember 30, 2021 . The nine months endedSeptember 30, 2022 gross profit margin was lower mainly due to increased ethane feedstock costs and natural gas prices, lower third party ethylene sales prices and volumes and the larger buyer deficiency fee and Shortfall recognized during the nine months endedSeptember 30, 2021 , partially offset by higher sales prices and volumes for co-products and ethylene sold to Westlake compared to the nine months endedSeptember 30, 2021 . Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by$2.1 million , or 8.5%, to$26.8 million in the nine months endedSeptember 30, 2022 as compared to$24.7 million in the nine months endedSeptember 30, 2021 . The increase in the nine months endedSeptember 30, 2022 was mainly attributable to a higher provision for doubtful accounts, partially offset by a decrease in service costs as compared to the nine months endedSeptember 30, 2021 . Interest Expense. Interest expense increased by$2.0 million to$8.7 million in the nine months endedSeptember 30, 2022 from$6.7 million in the nine months endedSeptember 30, 2021 , due to a higher average interest rate on debt. MLP Distributable Cash Flow. MLP distributable cash flow increased by$0.8 million to$55.6 million in the nine months endedSeptember 30, 2022 from$54.8 million in the nine months endedSeptember 30, 2021 . The increase in the nine months endedSeptember 30, 2022 , as compared to the prior-year period, was primarily attributable to decreased turnaround reserves and maintenance expense, partially offset by lower earnings at OpCo. EBITDA. EBITDA decreased by$8.0 million to$344.8 million in the nine months endedSeptember 30, 2022 from$352.8 million in the nine months endedSeptember 30, 2021 . The decrease, as compared to the prior-year period, was primarily due to higher ethane feedstock costs and natural gas prices for third party sales, lower ethylene sales prices and volumes to third parties, and the larger buyer deficiency fee and Shortfall recognized during the nine months endedSeptember 30, 2021 , partially offset by higher sales prices and volumes for co-products and ethylene sold to Westlake in the nine months endedSeptember 30, 2022 . 22
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CASH FLOW DISCUSSION FOR THE NINE MONTHS ENDED
Operating Activities
Operating activities provided cash of$341.2 million in the first nine months of 2022 compared to cash provided by operating activities of$386.6 million in the first nine months of 2021. The$45.4 million decrease in cash flows from operating activities was mainly due to a decrease in cash provided by working capital during the nine months endedSeptember 30, 2022 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$2.3 million in the first nine months of 2022 as compared to$57.3 million of cash provided in the first nine months of 2021, resulting in an overall unfavorable change of$55.0 million . The unfavorable change in working capital was mainly attributable to an unfavorable change in accounts payable and accrued and other liabilities due to the timing of payment of accruals related to the Petro 2 turnaround activities in 2021, as well as accounts receivable-third parties due to higher sales in the nine months endedSeptember 30, 2022 since our Petro 2 turnaround in the second half of 2021. These changes were partially offset by a favorable change in accounts receivable-Westlake due to the collection of the 2021 buyer deficiency fee and a portion of the 2021 Shortfall during the first nine months of 2022.
Investing Activities
Net cash used for investing activities during the first nine months of 2022 was$74.5 million as compared to net cash used for investing activities of$111.4 million in the first nine months of 2021. The$36.9 million decrease in net cash used for investing activities was mainly due to decreased net cash used under the Investment Management Agreement, partially offset by increased capital expenditures in the first nine months of 2022, as compared to the prior-year period. Capital expenditures during the first nine months of 2022 and 2021 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 the first nine months of 2022 was$264.3 million as compared to net cash used for financing activities of$273.7 million in the first nine months of 2021. The outflows during the first nine months of 2022 were related to distributions of$214.5 million to Westlake and of$49.8 million to other unitholders by the Partnership. The cash outflows during the first nine months of 2021 were related to distributions of$223.9 million to Westlake and of$49.8 million to other unitholders by the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Financing Arrangements
Pursuant to the terms of the Equity Distribution 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 investment banks, 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 ofSeptember 30, 2022 . 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 from Westlake, as well as future issuances of equity interests or debt. The Partnership maintains separate bank accounts, but Westlake 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. 23
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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.
Westlake's credit facility and various indentures do not prevent OpCo from making distributions to us.
OnOctober 31, 2022 , the board of directors ofWestlake Chemical Partners GP LLC , our general partner, approved a quarterly distribution of$0.4714 per unit payable onNovember 28, 2022 to unitholders of record as ofNovember 10, 2022 , 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 onSeptember 30, 2022 . 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. Total capital expenditures for the nine months endedSeptember 30, 2022 and 2021 were$45.5 million and$38.5 million , respectively. No such funding was required by OpCo during the nine months endedSeptember 30, 2022 and 2021. 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 ofSeptember 30, 2022 , our cash and cash equivalents totaled$19.5 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. InAugust 2017 , the Partnership, OpCo and Westlake executed the Investment Management Agreement that authorized Westlake to invest the Partnership's and OpCo's excess cash with Westlake for a term of up to a maximum of nine months. 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$135.9 million of cash invested under the Investment Management Agreement atSeptember 30, 2022 .
Indebtedness
OpCo Revolver
In connection with the IPO, OpCo entered into a$600.0 million revolving credit facility with an affiliate of Westlake, as amended inJune 2017 ,September 2018 ,March 2020 andJuly 2022 (the "OpCo Revolver") that may be used to fund growth projects and working capital needs. The OpCo Revolver is scheduled to mature onJuly 12, 2027 . OnJuly 12, 2022 , OpCo entered into the Second Amendment (the "OpCo Revolver Amendment") to the OpCo Revolver. The OpCo Revolver Amendment, among other things, extended the maturity date toJuly 12, 2027 and provided for the replacement of LIBOR with the Secured Overnight Financing Rate, as administered by theFederal Reserve Bank of New York ("SOFR"). Borrowings under the OpCo Revolver now bear interest at a variable rate of either (a) SOFR plus the Applicable Margin plus a 0.10% credit spread adjustment or, if SOFR is no longer available, (b) the Alternate Base Rate plus the Applicable Margin minus 1.0%. The Applicable Margin under the OpCo Revolver is 1.75%. As ofSeptember 30, 2022 , 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. 24
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MLP Revolver
In 2015, we entered into a senior, unsecured revolving credit agreement with an affiliate of Westlake, as amended in August andNovember 2017 ,March 2020 andJuly 2022 (the "MLP Revolver"). The MLP Revolver has a borrowing capacity of$600.0 million and is scheduled to mature onJuly 12, 2027 . OnJuly 12, 2022 , the Partnership entered into the Fourth Amendment (the "MLP Revolver Amendment") to the MLP Revolver. The MLP Revolver Amendment, among other things, extended the maturity date toJuly 12, 2027 and provided for the replacement of LIBOR with the SOFR. Borrowings under the MLP Revolver now bear interest at a variable rate of either (a) SOFR plus the Applicable Margin plus a 0.10% credit spread adjustment or, if SOFR is no longer available, (b) the Alternate Base Rate plus the Applicable Margin minus 1.0%. The Applicable Margin under the MLP Revolver varies between 1.75% and 2.75%, depending on the Partnership's Consolidated Leverage Ratio. 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), 5.50:1.0 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 ofSeptember 30, 2022 , 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.
Off-Balance Sheet Arrangements
None.
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FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are forward-looking statements. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expects," "will" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Forward-looking statements relate to matters such as:
•the amount of ethane that we are able to process, which could be adversely affected by, among other things, operating difficulties;
•the volume of ethylene that we are able to sell;
•the price at which we are able to sell ethylene;
•industry market outlook, including prices and margins in third-party ethylene and co-products sales;
•widespread outbreak of an illness or any other communicable disease, or any
other public health crisis, including the coronavirus ("COVID-19") pandemic and
efforts to contain its transmission;
•our plans and Westlake's plans to respond to the challenges presented by the COVID-19 pandemic;
•the impact of ongoing supply chain constraints and workforce availability
caused by the COVID-19 pandemic and the conflict between
•the parties to whom we will sell ethylene and on what basis;
•volumes of ethylene that Westlake may purchase, in addition to the minimum commitment under the Ethylene Sales Agreement;
•timing, funding and results of capital expenditures;
•our intended quarterly distributions and the manner of making such distributions;
•our ability to meet our liquidity needs;
•timing of and amount of capital expenditures;
•our At-the-Market program and the use of any net proceeds from any sales under that program;
•our and OpCo's ability to extend our credit agreements with Westlake;
•potential loans from Westlake to OpCo to fund OpCo's expansion capital expenditures in the future;
•expected mitigation of exposure to commodity price fluctuations;
•turnaround activities and the variability of OpCo's cash flow;
•receipt of any buyer deficiency fee and Shortfall under the Ethylene Sales Agreement;
•compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings, including any new laws, regulations or treaties that may come into force to limit or control carbon dioxide and other greenhouse gas emissions or to address other issues of climate change;
•our ability to receive indemnification from Westlake for environmental and other losses; and
•effects of pending legal proceedings.
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We have based these statements on assumptions and analysis in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. These statements are subject to a number of assumptions, risks and uncertainties, including those described under "Risk Factors" in the 2021 Form 10-K and the following:
•general economic and business conditions, including inflation, interest rates and recession;
•the cyclical nature of the chemical industry;
•the availability, cost and volatility of raw materials and energy;
•lower crude oil prices reducing the cost advantage of ethane-based ethylene producers;
•uncertainties associated with
•uncertainties associated with pandemic infectious diseases, particularly COVID-19;
•uncertainties associated with climate change;
•the potential impact on demand for ethylene due to initiatives such as recycling and customers seeking alternatives to polymers;
•current and potential governmental regulatory actions in
•industry production capacity and operating rates;
•the supply/demand balance for our products;
•competitive products and pricing pressures;
•instability in the credit and financial markets;
•access to capital markets;
•terrorist acts;
•operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);
•changes in laws or regulations;
•technological developments;
•information systems failures and cyberattacks;
•our ability to integrate acquired businesses;
•foreign currency exchange risks;
•our ability to implement our business strategies; and
•creditworthiness of our customers.
Many of these factors are beyond our ability to control or predict. Any of the
factors, or a combination of these factors, could materially affect our future
results of operations and the ultimate accuracy of the forward-looking
statements. These forward-looking statements are not guarantees of our future
performance, and our actual results and future developments may differ
materially from those projected in the forward-looking statements. Management
cautions against putting undue reliance on forward-looking statements or
projecting any future results based on such statements or present or prior
earnings levels. Every forward-looking statement speaks only as of the date of
the particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.
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