10-Q: Westlake Partners Q2 Profit Dips Amid Turnaround Costs

Westlake Chemical Partners LP reported a decline in net income and distributable cash flow for the first half of 2025, primarily due to an extended Petro 1 facility turnaround and higher feedstock costs.

Summary

• Net income for the three months ended June 30, 2025, was $85.8 million, a decrease of $2.2 million from $88.0 million in the prior-year quarter.
• Net income attributable to Westlake Chemical Partners LP for Q2 2025 slightly increased to $14.6 million from $14.4 million in Q2 2024.
• For the six months ended June 30, 2025, net income was $128.1 million, a significant decrease of $49.6 million compared to $177.7 million in the same period of 2024.
• Net income attributable to Westlake Chemical Partners LP for H1 2025 decreased by $9.8 million to $19.5 million from $29.3 million in H1 2024.
• Total net sales for Q2 2025 increased by 4.5% to $297.1 million, driven by higher ethylene sales prices to Westlake and a $13.6 million buyer deficiency fee, partially offset by lower sales volumes due to the Petro 1 turnaround.
• Total net sales for H1 2025 decreased by 6.0% to $534.7 million, primarily due to lower production volumes from the Petro 1 turnaround, despite higher ethylene sales prices and the buyer deficiency fee.
• Gross profit margin declined to 32.8% in Q2 2025 from 35.6% in Q2 2024, and to 28.4% in H1 2025 from 35.8% in H1 2024, mainly due to higher ethane feedstock and natural gas costs.
• Ethane feedstock costs increased by 25.2% in Q2 2025 and 33.6% in H1 2025 compared to the prior year periods, while natural gas costs increased by 80.2% in Q2 2025 and 68.4% in H1 2025.
• MLP distributable cash flow decreased by $2.1 million to $15.0 million in Q2 2025 and by $14.3 million to $19.7 million in H1 2025, primarily due to higher maintenance capital expenditures related to the Petro 1 turnaround.
• EBITDA increased slightly by $1.2 million to $124.4 million in Q2 2025 but decreased significantly by $48.2 million to $199.4 million in H1 2025.
• Cash and cash equivalents stood at $36.6 million as of June 30, 2025, down from $58.3 million at December 31, 2024.
• The company declared a quarterly cash distribution of $0.4714 per common unit for Q2 2025, payable on August 27, 2025.
• Outstanding variable rate debt totaled $399.7 million as of June 30, 2025, with a weighted average interest rate of 6.1%.

Sentiment

Score: 4

Explanation: The financial results for the first half of 2025 show a significant decline in key profitability and cash flow metrics, primarily driven by an extended turnaround and higher feedstock costs. While the fee-based model provides some stability and the Q2 net income attributable to the Partnership saw a slight increase, the overall operational performance is weaker. The fixed distribution per unit helps maintain investor confidence, but the underlying financial health has deteriorated in the short term due to operational challenges.

Positives

• Net sales for the second quarter of 2025 increased by $12.9 million, or 4.5%, compared to the second quarter of 2024, primarily due to higher ethylene sales prices to Westlake.
• A buyer deficiency fee of $13.6 million was recognized in Q2 2025, partially mitigating the impact of lower production volumes.
• Selling, general and administrative expenses decreased by $1.3 million (17.1%) in Q2 2025 and $0.9 million (6.1%) in H1 2025, mainly due to lower service costs.
• Interest expense to Westlake decreased by $0.8 million in Q2 2025 and $1.8 million in H1 2025 due to lower interest rates on outstanding debt.
• Net income attributable to Westlake Chemical Partners LP for Q2 2025 saw a slight increase of $0.2 million, despite a decrease in overall net income, due to lower interest expense.
• Net cash provided by investing activities was $49.7 million in H1 2025, a favorable change of $69.7 million compared to H1 2024, driven by $90.0 million in maturities of investments with Westlake.

Negatives

• Net income for the six months ended June 30, 2025, decreased significantly by $49.6 million, or 27.9%, compared to the same period in 2024.
• Net income attributable to Westlake Chemical Partners LP for H1 2025 decreased by $9.8 million, or 33.4%, compared to H1 2024.
• Gross profit decreased by $3.7 million in Q2 2025 and $51.8 million in H1 2025, with gross profit margins declining due to higher feedstock and natural gas costs.
• Ethylene and co-products sales volumes to Westlake and third parties were lower due to reduced production volumes from the Petro 1 turnaround.
• MLP distributable cash flow decreased by $2.1 million in Q2 2025 and $14.3 million in H1 2025, primarily due to higher maintenance capital expenditures from the Petro 1 turnaround.
• EBITDA decreased by $48.2 million in H1 2025, mainly due to higher feedstock and natural gas costs and lower sales volumes.
• Cash flows from operating activities decreased by $171.6 million in H1 2025, primarily due to the Petro 1 turnaround and lower income from operations.
• Cash and cash equivalents decreased by $21.7 million in H1 2025, ending at $36.6 million.

Risks

• Exposure to commodity price risk for approximately 5.0% of total ethylene production sold to third parties.
• Sensitivity to interest rate risk due to 100% variable rate debt; a 100 basis point increase would raise annual interest expense by approximately $4.0 million.
• Reliance on Westlake Corporation for a substantial majority of revenue (90.6% in Q2 2025, 86.0% in H1 2025) and for feedstock, services, and financing, creating concentration risk.
• Potential for operating interruptions (e.g., leaks, explosions, fires, weather, mechanical failure, unscheduled downtime, delays in turnaround activities, labor difficulties, transportation interruptions, spills, environmental risks) to adversely affect operations.
• Uncertainties associated with the United States and worldwide economies, including inflation, interest rates, and possible recession.
• The cyclical nature of the chemical industry and volatility of raw materials and energy prices.
• Potential impact on demand for ethylene due to initiatives like recycling and customers seeking alternatives to polymers.
• Current and potential governmental regulatory actions, including environmental regulations and climate change policies, could increase costs or limit operations.
• Risk of information systems failures and cyberattacks.
• Ability to extend credit agreements with Westlake and Westlake's obligation to provide future expansion capital expenditures are not guaranteed.

Future Outlook

The Partnership expects to distribute most of its excess cash generated from operations to partners. Future capital expenditures are expected to be funded primarily from external sources, including borrowings from Westlake and potential future issuances of equity or debt. The company believes its current liquidity sources will be sufficient to meet short-term working capital, long-term capital expenditure requirements, and quarterly cash distributions. The Services and Secondment Agreement with Westlake is set to expire in August 2026, with good faith negotiations for renewal expected prior to expiration.

Management Comments

• The accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Partnership's financial position as of June 30, 2025, its results of operations for the three and six months ended June 30, 2025 and 2024 and the changes in its cash position for the six months ended June 30, 2025 and 2024.
• Management seeks to maximize the profitability of operations by effectively managing operating expenses, maintenance capital expenditures, and turnaround costs.
• The Partnership seeks to manage operating and maintenance expenses on ethylene production facilities by scheduling maintenance and turnarounds over time to avoid significant variability in operating margins and minimize impact on cash flows, without compromising commitment to safety and environmental stewardship.
• The Partnership believes that cash generated from operations, the OpCo Revolver, the MLP Revolver, and, if necessary, the issuance of additional equity interests or debt, will be sufficient to meet short-term working capital requirements, long-term capital expenditure requirements, and to make quarterly cash distributions.

Industry Context

The filing highlights the impact of fluctuating raw material costs (ethane and natural gas) on profitability, a common challenge in the chemical industry. The fee-based Ethylene Sales Agreement with Westlake provides a degree of insulation from direct commodity price volatility for a significant portion of production, which is a strategic advantage compared to companies with more direct market exposure. However, the increase in feedstock costs still impacted gross profit margins. The mention of potential impact on ethylene demand due to recycling initiatives and alternatives to polymers reflects broader industry trends towards sustainability and circular economy principles, which could influence long-term demand for virgin ethylene.

Comparison to Industry Standards

• The Partnership's business model, with a long-term, fee-based Ethylene Sales Agreement covering 95% of budgeted production, provides more stable revenue and cash flows compared to typical commodity chemical producers that are fully exposed to market price fluctuations. This structure is similar to certain midstream energy partnerships or infrastructure funds that prioritize stable distributions over direct commodity exposure.
• The fixed margin of $0.10 per pound of ethylene, combined with cost recovery mechanisms, offers a predictable revenue stream, unlike integrated chemical companies such as LyondellBasell or Dow Inc. whose profitability is highly sensitive to the spread between feedstock costs and product prices.
• The significant reliance on Westlake Corporation for sales (over 80% of net sales) and operational services is a key characteristic, making direct comparisons to fully independent chemical producers less relevant. Instead, it aligns more with captive or joint venture operations where a major shareholder acts as the primary off-taker and service provider.
• The Petro 1 turnaround's impact on production volumes and capital expenditures is a common operational event for large-scale chemical facilities. The ability to recover buyer deficiency fees from Westlake due to the turnaround's extension demonstrates a contractual protection not typically available to all producers facing unplanned downtime.

Legal Proceedings

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

Related Party Transactions

• OpCo sells ethylene to Westlake under the Ethylene Sales Agreement, which accounted for approximately 90.6% of the Partnership's net sales in Q2 2025 and 86.0% in H1 2025.
• The Partnership recognized buyer deficiency fees of $13.6 million during Q2 and H1 2025 due to a forecasted annual production deficiency under the Ethylene Sales Agreement.
• Significant inputs in cost of sales, primarily feedstock and services, are purchased from Westlake under the Feedstock Supply Agreement and Services and Secondment Agreement.
• Westlake performs administrative functions for the Partnership under the Omnibus Agreement, with related charges included in selling, general and administrative expenses.
• Goods and services purchased from Westlake and capitalized as assets amounted to $6.481 million in H1 2025.
• The Partnership has a receivable of $43.924 million under the Investment Management Agreement, where Westlake invests the Partnership's excess cash.
• Accounts receivable from Westlake totaled $59.919 million as of June 30, 2025, primarily from ethylene sales and buyer deficiency fees.
• Accounts payable to Westlake totaled $8.572 million as of June 30, 2025, primarily for feedstock purchases and services.
• OpCo is obligated to Westlake under various long-term and short-term noncancelable operating leases, including for rail cars and land, with rentals paid to Westlake.
• Long-term debt payable to Westlake totaled $399.674 million as of June 30, 2025, comprising the OpCo Revolver ($22.619 million) and the MLP Revolver ($377.055 million).

Stakeholder Impact

• Shareholders (unitholders) experienced a flat net income per unit in Q2 2025 but a significant decrease in H1 2025, reflecting reduced profitability, though quarterly distributions remain consistent at $0.4714 per common unit.
• Westlake Corporation, as the majority owner of OpCo and a significant unitholder and general partner of the Partnership, is directly impacted by the operational performance and cash flows of OpCo, including the buyer deficiency fees and lower distributions from OpCo.
• Employees (seconded from Westlake) are not directly employed by the Partnership, but their services are integral to operations, with related costs impacting the Partnership's expenses.
• Creditors, primarily Westlake, are impacted by the Partnership's ability to service its variable rate debt, which remains in compliance with covenants despite operational challenges.
• Customers (primarily Westlake) are impacted by production volumes, as evidenced by the buyer deficiency fee triggered by the Petro 1 turnaround.

Next Steps

• Negotiate in good faith with Westlake for the renewal of the Services and Secondment Agreement prior to its expiration in August 2026.
• Continue to manage operating expenses, maintenance capital expenditures, and turnaround costs to maximize profitability and minimize cash flow variability.
• Potentially utilize the At-the-Market (ATM) program to issue common units for general partnership purposes, including funding potential drop-downs and other acquisitions.
• Continue to rely on cash generated from operations, the OpCo Revolver, and the MLP Revolver for liquidity, and potentially seek additional equity or debt financing if needed.

Key Dates

Recommendation

The filing presents a mixed financial picture. While the core fee-based business model with Westlake provides stability and predictable distributions, the significant decline in net income, MLP distributable cash flow, and EBITDA for the first half of 2025, primarily due to the extended Petro 1 turnaround and higher feedstock costs, is a concern. The flat net income per unit in Q2 2025, despite overall net income decline, is a positive for unitholders, but the H1 2025 per unit income is down. The company's liquidity appears adequate, and it maintains compliance with debt covenants. Given the temporary nature of the turnaround impact and the underlying stable business model, a 'hold' recommendation is appropriate. Investors should monitor future operational efficiency, feedstock cost trends, and the renewal of key agreements with Westlake.

Keywords

Ethylene production, Chemical industry, Midstream, Master Limited Partnership, MLP, Petrochemicals, SEC filing, Quarterly report, Financial results, Westlake Chemical Partners, WLKP, Petro 1 turnaround, Ethylene sales agreement, Distributable cash flow, EBITDA, Related party transactions, Capital expenditures, Debt, Liquidity