10-Q: Westlake Chemical Partners Q3 Net Income Drops Amid Higher Costs

Westlake Chemical Partners LP reported a significant decline in third-quarter net income and distributable cash flow, primarily driven by increased feedstock and natural gas costs and lower third-party sales volumes, despite higher sales to Westlake.

Summary

• Net income for the third quarter of 2025 was $86.2 million, a decrease of $17.9 million from $104.1 million in the third quarter of 2024.
• Net income attributable to Westlake Chemical Partners LP for Q3 2025 was $14.7 million, down $3.4 million from $18.1 million in Q3 2024.
• Net sales for Q3 2025 increased by 11.5% to $308.9 million, primarily due to higher ethylene sales prices and volumes to Westlake, partially offset by lower third-party sales.
• Gross profit decreased to $99.4 million in Q3 2025 from $116.9 million in Q3 2024, with gross profit margin falling to 32.2% from 42.2%.
• MLP distributable cash flow decreased by $3.0 million to $14.9 million in Q3 2025 from $17.9 million in Q3 2024.
• EBITDA for Q3 2025 was $126.1 million, a decrease of $13.0 million from $139.1 million in Q3 2024.
• For the nine months ended September 30, 2025, net income was $214.3 million, a decrease of $67.5 million from $281.8 million in the prior-year period.
• Net sales for the nine months ended September 30, 2025, decreased by 0.3% to $843.6 million, mainly due to lower sales volumes from the Petro 1 turnaround, partially offset by higher sales prices and a $13.6 million buyer deficiency fee.
• Cash and cash equivalents stood at $37.9 million as of September 30, 2025, down from $58.3 million at December 31, 2024.
• Capital expenditures for the nine months ended September 30, 2025, increased to $70.0 million from $35.5 million in the prior-year period, primarily due to the Petro 1 turnaround.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in net income, gross profit, MLP distributable cash flow, and EBITDA, driven by higher feedstock costs and operational delays. While key agreements were renewed, the financial performance indicates substantial headwinds.

Positives

• Net sales increased by 11.5% to $308.9 million in the third quarter of 2025 compared to the prior year, driven by higher ethylene sales prices and volumes to Westlake.
• Interest expense decreased to $5.9 million in Q3 2025 from $6.7 million in Q3 2024, mainly due to lower interest rates on outstanding debt.
• Key agreements, including the Ethylene Sales Agreement and Feedstock Supply Agreement, were renewed through December 31, 2027, providing long-term stability for core operations.

Negatives

• Net income for Q3 2025 decreased by $17.9 million to $86.2 million, and net income attributable to the Partnership decreased by $3.4 million to $14.7 million.
• Gross profit margin significantly declined to 32.2% in Q3 2025 from 42.2% in Q3 2024, primarily due to higher ethane feedstock and natural gas costs.
• MLP distributable cash flow decreased by $3.0 million to $14.9 million in Q3 2025, attributed to decreased earnings at OpCo and higher maintenance capital expenditures.
• EBITDA decreased by $13.0 million to $126.1 million in Q3 2025, mainly due to lower third-party sales prices and increased feedstock and natural gas costs.
• For the nine months ended September 30, 2025, net income, MLP distributable cash flow, and EBITDA all saw significant declines compared to the prior-year period.
• Cash provided by operating activities decreased by $192.4 million to $160.1 million for the nine months ended September 30, 2025, mainly due to the Petro 1 turnaround and lower income from operations.
• Working capital changes resulted in a $26.2 million cash outflow for the nine months ended September 30, 2025, an unfavorable change of $27.4 million compared to the prior year.

Risks

• Operating difficulties, such as mechanical failures, unscheduled downtime, or delays in turnaround activities, could adversely affect ethane processing and ethylene production volumes.
• Fluctuations in the volume and price of ethylene and co-products sales, particularly to third parties, can impact revenue and profitability.
• The cyclical nature of the chemical industry, coupled with volatility in raw material (ethane) and energy (natural gas) costs, poses a significant risk to operating margins.
• Lower crude oil prices could reduce the cost advantage of ethane-based ethylene producers, affecting competitiveness.
• Geopolitical tensions and conflicts, such as those in the Middle East and between Russia and Ukraine, can cause supply chain constraints and impact market conditions.
• Compliance with present and future environmental regulations, including those related to carbon dioxide and greenhouse gas emissions, could lead to increased costs, penalties, or required capital expenditures.
• Exposure to interest rate risk due to variable rate debt, with a hypothetical 100 basis point increase in interest rates potentially increasing annual interest expense by approximately $4.0 million.
• The ability to extend credit agreements with Westlake and the potential for Westlake to provide future loans for expansion capital expenditures are not guaranteed.
• Information systems failures and cyberattacks pose risks to operations and data security.

Future Outlook

Management expects to distribute most excess cash generated by operations to partners. Future capital expenditures are anticipated to be funded primarily from external sources, including borrowing from Westlake or future issuances of equity or debt. The At-the-Market (ATM) program may be utilized for general partnership purposes, including funding potential drop-downs and other acquisitions. The company aims to manage operating and maintenance expenses by scheduling turnarounds to minimize cash flow impact and reserves cash annually for turnaround costs. Westlake is expected to loan additional cash to OpCo for expansion capital expenditures, though it is not obligated to do so.

Management Comments

• The increase in net sales in the third quarter of 2025 was primarily due to higher ethylene sales prices and sales volumes to Westlake, partially offset by lower ethylene and co-products sales prices and sales volumes to third parties.
• Income from operations, net income and net income attributable to the Partnership for the third quarter of 2025 were lower due to lower third-party sales prices and higher ethane feedstock and natural gas costs, partially offset by higher sales to Westlake.
• The decrease in net sales for the nine months ended September 30, 2025, was mainly due to lower ethylene and co-products sales volumes to Westlake and third parties as a result of lower production volumes attributable to the Petro 1 turnaround.
• The decrease in MLP distributable cash flow for the nine months ended September 30, 2025, was primarily attributable to lower ethylene and co-products sales volumes and higher maintenance capital expenditures due to the Petro 1 turnaround.

Industry Context

The chemical industry is cyclical and highly sensitive to the availability, cost, and volatility of raw materials and energy, as evidenced by the significant increase in ethane feedstock and natural gas costs impacting profitability. The company's fee-based Ethylene Sales Agreement with Westlake mitigates some direct commodity price risk, but overall market conditions for third-party sales and input costs remain influential. The renewal of key agreements with Westlake provides a degree of stability in a volatile market, aligning with a strategy to secure long-term supply and off-take arrangements common in the petrochemical sector.

Comparison to Industry Standards

• The significant increase in feedstock (ethane +47.4% in Q3 2025 vs Q3 2024) and natural gas costs (+45.2% in Q3 2025 vs Q3 2024) is a common challenge across the petrochemical industry, impacting margins for producers reliant on these inputs. Companies like LyondellBasell or Dow, also operating in the olefins sector, would likely face similar cost pressures, though their integrated structures or diverse portfolios might offer different mitigation strategies.
• The decline in gross profit margin from 42.2% to 32.2% in Q3 2025 suggests a more pronounced impact of cost inflation relative to pricing power, which could be worse than some peers with more diversified product lines or stronger contractual protections.
• The fee-based Ethylene Sales Agreement with Westlake, including a fixed margin per pound of $0.10, provides a stable revenue component that is generally more resilient than pure merchant market sales, offering a structural advantage compared to companies with higher exposure to spot market volatility.
• The increase in capital expenditures for the nine months ended September 30, 2025, to $70.0 million, largely due to the Petro 1 turnaround, is typical for asset-intensive industries like petrochemicals, where periodic major maintenance is essential. The impact on cash flow and profitability during such periods is a standard industry occurrence, though the extension of the turnaround indicates potential operational inefficiencies compared to planned schedules.

Corporate Governance

Legal Proceedings

• The Partnership is subject to environmental laws and regulations that may require mitigation of contamination and can impose civil and criminal sanctions.
• Westlake subsidiaries indemnify the Partnership for certain environmental and other liabilities that occurred or existed prior to August 4, 2014, under the Omnibus Agreement.
• Westlake subsidiaries indemnify the Partnership for certain liabilities incurred in connection with the performance of Westlake's services under the Services and Secondment Agreement.
• Management does not believe that any legal proceedings will have a material adverse effect on the Partnership's financial condition, results of operations, or cash flows, considering applicable insurance and indemnification.

Related Party Transactions

• OpCo sells ethylene to Westlake under the Ethylene Sales Agreement, which accounts for a substantial majority of the Partnership's revenue (89.5% of net sales in Q3 2025, 87.3% YTD 2025).
• The Partnership recognized buyer deficiency fees of $13.6 million in the nine months ended September 30, 2025, from Westlake due to a forecasted annual production deficiency related to the Petro 1 turnaround.
• Feedstock and other services are purchased from Westlake, with feedstock purchases totaling $95.1 million in Q3 2025 and $271.2 million YTD 2025.
• Westlake provides various administrative functions under the Omnibus Agreement, with related charges of $6.7 million in Q3 2025 and $18.4 million YTD 2025.
• The Partnership has a receivable under the Investment Management Agreement with Westlake, totaling $13.4 million as of September 30, 2025, earning a market return plus five basis points.
• Long-term debt payable to Westlake totals $399.7 million, comprising the OpCo Revolver ($22.6 million) and the MLP Revolver ($377.1 million), both bearing variable interest rates.

Stakeholder Impact

• Shareholders: Experienced a decrease in net income per unit ($0.42 in Q3 2025 vs $0.51 in Q3 2024) and MLP distributable cash flow, potentially impacting future unit value and distribution growth, despite a consistent quarterly distribution of $0.4714 per common unit.
• Westlake Corporation (Parent Company): As the primary customer, debt holder, and noncontrolling interest holder in OpCo, Westlake's financial performance and strategic decisions significantly influence the Partnership. The renewal of key agreements provides continued revenue and operational stability for the Partnership.
• Employees: While the Partnership and OpCo have no direct employees, Westlake provides all operating and administrative services, meaning Westlake's employees are indirectly critical to the Partnership's operations.
• Creditors: The Partnership maintains compliance with all covenants under its revolving credit facilities with Westlake, indicating continued financial stability for its related-party debt obligations.

Next Steps

• Payment of the quarterly cash distribution of $0.4714 per common unit on November 26, 2025, to unitholders of record as of November 10, 2025.
• Continued evaluation of the impact of new accounting standards, including ASU No. 2025-05 (Credit Losses), ASU No. 2024-03 (Income Statement Expenses), and ASU No. 2023-09 (Income Taxes).
• Potential utilization of the At-the-Market (ATM) program for general partnership purposes, including funding acquisitions.
• Ongoing management of operating expenses, maintenance capital expenditures, and turnaround costs to maximize profitability and minimize cash flow impact.

Key Dates

Recommendation

The company's Q3 2025 results show a significant decline in profitability and cash flow, primarily due to higher feedstock and natural gas costs and operational delays from the Petro 1 turnaround. This negative financial performance would typically warrant a 'sell' or 'strong sell' recommendation. However, the core business model, characterized by long-term, fee-based agreements with Westlake Corporation (a strong parent company), provides a stable revenue base and mitigates direct commodity price exposure for a substantial portion of its sales. The recent renewal of these critical agreements through 2027 further reinforces this stability. While current headwinds are strong, the structural protections and the parent company relationship suggest that the long-term viability of the partnership remains intact. Therefore, a 'hold' recommendation is appropriate, acknowledging the current challenges while recognizing the underlying stability and strategic importance of the assets within the Westlake ecosystem. Investors should monitor commodity price trends and operational efficiency closely.

Keywords

Ethylene production, Petrochemicals, MLP, Westlake Chemical Partners, SEC 10-Q, Financial results, Energy costs, Feedstock, Chemical industry, Quarterly report