What changed in Westlake Chemical Partners LP's 10-K — 2022 vs 2023
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Paragraph-level year-over-year comparison of Westlake Chemical Partners LP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.
+183 added−193 removedSource: 10-K (2024-02-28) vs 10-K (2023-03-01)
Top changes in Westlake Chemical Partners LP's 2023 10-K
183 paragraphs added · 193 removed · 147 edited across 6 sections
- Item 7. Management's Discussion & Analysis+69 / −93 · 60 edited
- Item 1A. Risk Factors+85 / −71 · 62 edited
- Item 1. Business+14 / −14 · 12 edited
- Item 5. Market for Registrant's Common Equity+6 / −6 · 5 edited
- Item 7A. Quantitative and Qualitative Disclosures About Market Risk+6 / −6 · 6 edited
Item 1. Business
Business — how the company describes what it does
12 edited+2 added−2 removed68 unchanged
Item 1. Business
Business — how the company describes what it does
12 edited+2 added−2 removed68 unchanged
2022 filing
2023 filing
Biggest changeWe expect insurance to cover most of the costs associated with these lawsuits. Also, see the discussion of our environmental matters contained in "Item 1A. Risk Factors" and "Item 3. Legal Proceedings" below. 6 Table of Contents Human Capital Neither we nor OpCo has any employees.
Biggest changeWestlake is responsible for indemnifying the Partnership in connection with any loss OpCo may have incurred as a result of the fire. 6 Table of Contents Also, see the discussion of our environmental matters contained in "Item 1A. Risk Factors" and "Item 3. Legal Proceedings" below. Human Capital Neither we nor OpCo has any employees.
Westlake is responsible for human capital management policies, including any human capital measures and objectives that management focuses on in managing the business. Legal Proceedings In the ordinary conduct of our business, we and Westlake and our and Westlake's subsidiaries, including OpCo, are subject to periodic lawsuits, investigations and claims, including environmental claims and employee related matters.
Westlake is responsible for human capital management policies, including any human capital measures and objectives that management focuses on in managing the business. Legal Proceedings In the ordinary conduct of our business, we and Westlake and our and Westlake's subsidiaries, including OpCo, are subject to lawsuits, investigations and claims, including environmental claims and employee related matters.
OpCo primarily uses ethane (a component of natural gas liquids, or NGLs) to produce ethylene. 1 Table of Contents Ownership of Westlake Chemical Partners LP The following simplified diagram depicts our organizational structure as of December 31, 2022: Public Common Units 59.9 % Interests of Westlake: Common Units 40.1 % Non-Economic General Partner Interest — Incentive Distribution Rights — (1) 100.0 % ______________________________ (1) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage.
OpCo primarily uses ethane (a component of natural gas liquids, or NGLs) to produce ethylene. 1 Table of Contents Ownership of Westlake Chemical Partners LP The following simplified diagram depicts our organizational structure as of December 31, 2023: Public Common Units 59.9 % Interests of Westlake: Common Units 40.1 % Non-Economic General Partner Interest — Incentive Distribution Rights (1) — 100.0 % ______________________________ (1) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage.
The following table provides information regarding OpCo's ethylene production facilities as of December 31, 2022: Plant Location (Description) Annual Production Capacity (millions of pounds) Feedstock Primary Uses of Ethylene Lake Charles, Louisiana (Petro 1) 1,500 Ethane PE and PVC Lake Charles, Louisiana (Petro 2) 1,490 Ethane, ethane/propane mix, propane, butane or naphtha PE and PVC Calvert City, Kentucky (Calvert City Olefins) 730 Ethane or propane PVC Total 3,720 Lake Charles Olefins Two of OpCo's ethylene production facilities, which we refer to as Petro 1 and Petro 2 and, collectively, as Lake Charles Olefins, are located at Westlake's Lake Charles site.
The following table provides information regarding OpCo's ethylene production facilities as of December 31, 2023: Plant Location (Description) Annual Production Capacity (millions of pounds) Feedstock Primary Uses of Ethylene Lake Charles, Louisiana (Petro 1) 1,500 Ethane PE and PVC Lake Charles, Louisiana (Petro 2) 1,490 Ethane, ethane/propane mix, propane, butane or naphtha PE and PVC Calvert City, Kentucky (Calvert City Olefins) 730 Ethane or propane PVC Total 3,720 Lake Charles Olefins Two of OpCo's ethylene production facilities, which we refer to as Petro 1 and Petro 2 and, collectively, as Lake Charles Olefins, are located at Westlake's Lake Charles site.
Because we own OpCo's general partner, we have control over all of OpCo's assets and operations. As of December 31, 2022, Westlake held a 77.2% limited partner interest in OpCo and held a 40.1% limited partner interest in us (consisting of 14,122,230 common units), our general partner interest and our incentive distribution rights.
Because we own OpCo's general partner, we have control over all of OpCo's assets and operations. As of December 31, 2023, Westlake held a 77.2% limited partner interest in OpCo and held a 40.1% limited partner interest in us (consisting of 14,122,230 common units), our general partner interest and our incentive distribution rights.
As of December 31, 2022, 148 employees were seconded to OpCo. Of these, 25 are covered by collective bargaining agreements that expire on November 1, 2024. There have been no strikes, lockouts or work stoppages at OpCo's facilities. We believe that Westlake's relationship with the local union officials and bargaining committees is open and positive.
As of December 31, 2023, 152 employees were seconded to OpCo. Of these, 25 are covered by collective bargaining agreements that expire on November 1, 2024. There have been no strikes, lockouts or work stoppages at OpCo's facilities. We believe that Westlake's relationship with the local union officials and bargaining committees is open and positive.
Additionally, in 2023 and 2024, capital expenditures of approximately $41.5 million and $9.1 million, respectively, are expected to be paid in connection with corrective actions required by the Environmental Protection Agency (the "EPA") to resolve the flare enforcement matter discussed below. Pursuant to the Omnibus Agreement, Westlake has paid and will continue to pay for all such corrective actions.
Additionally, in 2024, capital expenditures of approximately $1.0 million are expected to be paid by Westlake in connection with corrective actions required by the Environmental Protection Agency (the "EPA") to resolve the flare enforcement matter discussed below. Pursuant to the Omnibus Agreement, Westlake has paid and will continue to pay for all such corrective actions.
It is our policy to comply with all environmental, health and safety requirements in the jurisdictions in which we and OpCo operate and to provide safe and environmentally sound workplaces for our employees. In some cases, compliance can be achieved only by incurring capital expenditures. In 2022, OpCo incurred capital expenditures of $1.8 million related to environmental compliance.
It is our policy to comply with all environmental, health and safety requirements in the jurisdictions in which we and OpCo operate and to provide safe and environmentally sound workplaces for our employees. In some cases, compliance can be achieved only by incurring capital expenditures. In 2023, OpCo incurred capital expenditures of $0.6 million related to environmental compliance.
In June 2022, the Department of Justice announced that certain subsidiaries of Westlake, including OpCo, the EPA and state environmental agencies had reached agreement on a consent decree resolving this matter.
In June 2022, the Department of Justice announced that certain subsidiaries of Westlake, including OpCo, the EPA and state environmental agencies had reached agreement on a consent decree resolving this matter. The consent decree was entered by the court and became effective in October 2022.
We estimate that OpCo will make capital expenditures of approximately $3.4 million in 2023 and $3.2 million in 2024, respectively, related to environmental compliance.
We estimate that OpCo will make capital expenditures of approximately $3.5 million in 2024 and $3.6 million in 2025, respectively, related to environmental compliance.
Implementation of the requirements under the decree is estimated to cost approximately $110 million, which includes capital expenditures associated with installation of the flare gas recovery units that are required to be installed at our Calvert City and Lake Charles facilities.
We estimate that the total cost to implement the requirements under the decree will be approximately $110 million, which includes capital expenditures associated with installation of the flare gas recovery units and monitoring and control equipment that are required to be installed at our Calvert City and Lake Charles facilities.
Westlake has paid all penalties required under the consent decree and has planned, budgeted for and scheduled all compliance requirements going forward. As discussed above, Westlake is expected to fully indemnify us for such costs.
The substantial majority of the capital expenditures and other costs required to comply with the consent decree were incurred in 2021, 2022, or 2023. Westlake has paid all penalties required under the consent decree and has planned, budgeted for and scheduled all compliance requirements going forward. As discussed above, Westlake is expected to fully indemnify us for such costs.
Removed
The capital expenditures and other costs required to comply with the consent decree have either been incurred in 2021 and 2022 or will be incurred over the course of 2023 and 2024. The consent decree was entered by the court and became effective in October 2022.
Added
In September 2021, Westlake and OpCo were subject to lawsuits related to a flash fire at the quench tower of the Petro 2 facility. Contractors and employees working on and near the quench tower were injured.
Removed
There are lawsuits pending in connection with the flash fire at the quench tower that occurred in September 2021 during the Petro 2 turnaround, which are described in Note 16 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Added
Final settlements were reached with all of the plaintiffs to fully resolve the lawsuits by Westlake, but payment by the insurance carriers has not yet been completed.
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
62 edited+23 added−9 removed224 unchanged
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
62 edited+23 added−9 removed224 unchanged
2022 filing
2023 filing
Biggest changeThe impact and effects of public health crises, pandemics and epidemics, including the ongoing coronavirus (COVID-19) pandemic, could materially adversely affect Westlake's business, financial condition and results of operations. • OpCo is a restricted subsidiary under certain indentures governing Westlake's senior notes. • The ethylene sales price charged under the Ethylene Sales Agreement is designed to permit OpCo to cover the substantial majority of its operating costs, but not our public partnership and other OpCo costs, which reduce our net operating profit. • If OpCo is unable to renew or extend the Ethylene Sales Agreement beyond the initial 12-year term or the other agreements with Westlake upon expiration of these agreements, our ability to make distributions in the future could be materially adversely affected and the value of our units could decline. • OpCo has the right to use the real property underlying Lake Charles Olefins and Calvert City Olefins pursuant to two, 50-year site lease agreements with Westlake.
Biggest changeIf Westlake does not pay us under the terms of the Ethylene Sales Agreement or if our assets fail to perform as intended, we may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders. • OpCo is subject to the credit risk of Westlake on a substantial majority of its revenues, and Westlake's leverage and creditworthiness could adversely affect our ability to make distributions to our unitholders. • OpCo is a restricted subsidiary under certain indentures governing Westlake's senior notes. • The ethylene sales price charged under the Ethylene Sales Agreement is designed to permit OpCo to cover the substantial majority of its operating costs, but not our public partnership and other OpCo costs, which reduce our net operating profit. • If OpCo is unable to renew or extend the Ethylene Sales Agreement beyond the initial 12-year term or the other agreements with Westlake upon expiration of these agreements, our ability to make distributions in the future could be materially adversely affected and the value of our units could decline. • OpCo has the right to use the real property underlying Lake Charles Olefins and Calvert City Olefins pursuant to two, 50-year site lease agreements with Westlake.
Tax Risks Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, and not being subject to a material amount of entity-level taxation.
Tax Risks Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, and not being subject to a material amount of entity-level taxation.
The Final Regulations, consistent with our private letter ruling, treat our income from the production, transportation, storage and marketing of ethylene and its co-products constitutes as "qualifying income." There can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department's interpretation of the qualifying income rules in a manner that could impact our ability to qualify as a partnership in the future.
The Final Regulations, consistent with our private letter ruling, treat our income from the production, transportation, storage and marketing of ethylene and its co-products as "qualifying income." There can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department's interpretation of the qualifying income rules in a manner that could impact our ability to qualify as a partnership in the future.
For example, our partnership agreement provides that: • whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is generally required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity; • our general partner and its officers and directors will not be liable for monetary damages or otherwise to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that such losses or liabilities were the result of conduct in which our general partner or its officers or directors engaged in bad faith, meaning that they believed that the decision was adverse to the interest of the partnership or, with respect to any criminal conduct, with knowledge that such conduct was unlawful; and • our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is: 19 Table of Contents (1) approved by the conflicts committee of the board of directors, although our general partner is not obligated to seek such approval; or (2) approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.
For example, our partnership agreement provides that: • whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is generally required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity; • our general partner and its officers and directors will not be liable for monetary damages or otherwise to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that such losses or liabilities were the result of conduct in which our general partner or its officers or directors engaged in bad faith, meaning that they believed that the decision was adverse to the interest of the partnership or, with respect to any criminal conduct, with knowledge that such conduct was unlawful; and • our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is: (1) approved by the conflicts committee of the board of directors, although our general partner is not obligated to seek such approval; or (2) approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.
These conflicts include the following situations, among others: • our general partner is allowed to take into account the interests of parties other than us, such as Westlake, in exercising certain rights under our partnership agreement; • neither our partnership agreement nor any other agreement requires Westlake to pursue a business strategy that favors us; • our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner's liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty; • except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval; • our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders; • our general partner determines the amount and timing of any cash expenditure and whether an expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus.
These conflicts include the following situations, among others: 18 Table of Contents • our general partner is allowed to take into account the interests of parties other than us, such as Westlake, in exercising certain rights under our partnership agreement; • neither our partnership agreement nor any other agreement requires Westlake to pursue a business strategy that favors us; • our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner's liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty; • except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval; • our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders; • our general partner determines the amount and timing of any cash expenditure and whether an expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus.
Many of the assets we use to produce ethylene are generally long-lived assets. As a result, some of those assets have been in service for many decades. The age and condition of these assets could result in increased maintenance or repair expenditures.
Many of the assets we use to produce ethylene are long-lived assets. As a result, some of those assets have been in service for many decades. The age and condition of these assets could result in increased maintenance or repair expenditures.
Moreover, the costs of any contest between us and the IRS will result in a reduction in our cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders. 24 Table of Contents If the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustments directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced and our current and former unitholders may be required to indemnify us for any taxes (including any applicable penalties and interest) resulting from such audit adjustments that were paid on such unitholders behalf.
Moreover, the costs of any contest between us and the IRS will result in a reduction in our cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders. 25 Table of Contents If the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustments directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced and our current and former unitholders may be required to indemnify us for any taxes (including any applicable penalties and interest) resulting from such audit adjustments that were paid on such unitholders behalf.
This cash may be used to fund distributions on the incentive distribution rights; • our general partner determines which costs incurred by it and its affiliates are reimbursable by us; • our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf; • our general partner intends to limit its liability regarding our contractual and other obligations; • our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of the common units; • our general partner controls the enforcement of obligations that it and its affiliates owe to us; • our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and 18 Table of Contents • our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to Westlake's incentive distribution rights without the approval of the conflicts committee of the board of directors or the unitholders.
This cash may be used to fund distributions on the incentive distribution rights; • our general partner determines which costs incurred by it and its affiliates are reimbursable by us; • our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf; • our general partner intends to limit its liability regarding our contractual and other obligations; • our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of the common units; • our general partner controls the enforcement of obligations that it and its affiliates owe to us; • our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and • our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to Westlake's incentive distribution rights without the approval of the conflicts committee of the board of directors or the unitholders.
The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders. 21 Table of Contents The holder or holders of our incentive distribution rights may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our board of directors or the holders of our common units.
The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders. 22 Table of Contents The holder or holders of our incentive distribution rights may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our board of directors or the holders of our common units.
It also could affect the amount of gain recognized from the sale of our common units, have a negative impact on the value of our common units or result in audit adjustments to our unitholders' tax returns without the benefit of additional deductions. 27 Table of Contents Our unitholders will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where they do not live as a result of investing in our common units.
It also could affect the amount of gain recognized from the sale of our common units, have a negative impact on the value of our common units or result in audit adjustments to our unitholders' tax returns without the benefit of additional deductions. 28 Table of Contents Our unitholders will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where they do not live as a result of investing in our common units.
Westlake's obligations to purchase ethylene under the Ethylene Sales Agreement may be temporarily suspended to the extent OpCo is unable to perform its obligations caused by any of certain events outside the reasonable control of OpCo.
Westlake's obligations to purchase ethylene under the Ethylene Sales Agreement may be temporarily suspended to the extent OpCo is unable to perform its obligations caused by certain events outside the reasonable control of OpCo.
Our general partner and its affiliates, including Westlake, may have conflicts of interest with us and have limited duties, and they may favor their own interests to our detriment and that of our unitholders. • Our general partner has limited its liability regarding our obligations. • Our partnership agreement replaces our general partner's fiduciary duties to holders of our units. 8 Table of Contents • Westlake and other affiliates of our general partner may compete with us. • Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units trade. • Even if holders of our common units are dissatisfied, they cannot currently remove our general partner without its consent. • Control of our general partner may be transferred to a third party without unitholder consent. • Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.
Our general partner and its affiliates, including Westlake, may have conflicts of interest with us and have limited duties, and they may favor their own interests to our detriment and that of our unitholders. • Our general partner has limited its liability regarding our obligations. • Our partnership agreement replaces our general partner's fiduciary duties to holders of our units. • Westlake and other affiliates of our general partner may compete with us. • Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units trade. • Even if holders of our common units are dissatisfied, they cannot currently remove our general partner without its consent. • Control of our general partner may be transferred to a third party without unitholder consent. • Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.
In addition, because the amount realized includes a unitholder's share of our nonrecourse liabilities, if a unitholder sells its units, a unitholder may incur a tax liability in excess of the amount of cash received from the sale. 25 Table of Contents A substantial portion of the amount realized from a unitholder's sale of our units, whether or not representing gain, may be taxed as ordinary income to such unitholder due to potential recapture items, including depreciation recapture.
In addition, because the amount realized includes a unitholder's share of our nonrecourse liabilities, if a unitholder sells its units, a unitholder may incur a tax liability in excess of the amount of cash received from the sale. 26 Table of Contents A substantial portion of the amount realized from a unitholder's sale of our units, whether or not representing gain, may be taxed as ordinary income to such unitholder due to potential recapture items, including depreciation recapture.
Any acquisition involves potential risks, some of which are beyond our control, including, among other things: • mistaken assumptions about revenues and costs, including synergies; • the inability to successfully integrate the businesses we acquire; • the inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets; • the assumption of unknown liabilities; • limitations on rights to indemnity from the seller; • mistaken assumptions about the overall costs of equity or debt; • the diversion of management's attention from other business concerns; • unforeseen difficulties in connection with operating in new product areas or new geographic areas; and • customer or key employee losses at the acquired businesses.
Any acquisition involves potential risks, some of which are beyond our control, including, among other things: • mistaken assumptions about revenues and costs, including synergies; • the inability to successfully integrate the businesses we acquire; • the inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets; • the assumption of unknown liabilities; • limitations on rights to indemnity from the seller; • mistaken assumptions about the overall costs of equity or debt; 14 Table of Contents • the diversion of management's attention from other business concerns; • unforeseen difficulties in connection with operating in new product areas or new geographic areas; and • customer or key employee losses at the acquired businesses.
Current and prospective non-U.S. unitholders should consult their tax advisors regarding the impact of these rules on an investment in our common units. 26 Table of Contents We treat each purchaser of our common units as having the same tax benefits without regard to the common units actually purchased.
Current and prospective non-U.S. unitholders should consult their tax advisors regarding the impact of these rules on an investment in our common units. 27 Table of Contents We treat each purchaser of our common units as having the same tax benefits without regard to the common units actually purchased.
This effectively permits a "change of control" without the vote or consent of the unitholders. 20 Table of Contents Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.
This effectively permits a "change of control" without the vote or consent of the unitholders. 21 Table of Contents Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.
Furthermore, expansions may also coincide with turnarounds, which may complicate and delay the completion of such turnarounds.
Furthermore, facility expansions may also coincide with turnarounds, which may complicate and delay the completion of such turnarounds.
Moreover, given the integration of OpCo's ethylene production facilities and Westlake's Lake Charles and Calvert City facilities, it may not be practical for us or for a third party to provide site services or labor for OpCo's ethylene production facilities separately. 13 Table of Contents OpCo's ability to receive greater cash flows from increased production may be limited by the Ethylene Sales Agreement.
Moreover, given the integration of OpCo's ethylene production facilities and Westlake's Lake Charles and Calvert City facilities, it may not be practical for us or for a third party to provide site services or labor for OpCo's ethylene production facilities separately. OpCo's ability to receive greater cash flows from increased production may be limited by the Ethylene Sales Agreement.
Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner's duties, even if we could have obtained more favorable terms without the limitation on liability. Our partnership agreement replaces our general partner's fiduciary duties to holders of our units.
Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner's duties, even if we could have obtained more favorable terms without the limitation on liability. 19 Table of Contents Our partnership agreement replaces our general partner's fiduciary duties to holders of our units.
We are subject to increasing climate-related risks and uncertainties, many of which are outside of our control. Climate change may result in more frequent severe weather events, potential changes in precipitation patterns and variability in weather patterns, which can disrupt our operations as well as those of our customers, partners and suppliers.
We are subject to increasing climate-related risks and uncertainties, many of which are outside of our control. Climate change may result in more frequent severe weather events, potential changes in precipitation patterns, flooding, sea level rise and variability in weather patterns, which can disrupt our operations as well as those of our customers, partners and suppliers.
The vote, including Westlake, of the holders of at least 66 2 / 3 % of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. As of February 22, 2023, Westlake owned an aggregate of 40.1% of our common units.
The vote, including Westlake, of the holders of at least 66 2 / 3 % of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. As of February 21, 2024, Westlake owned an aggregate of 40.1% of our common units.
We expect that each of OpCo's facilities will have a turnaround approximately once every five years and will not operate for typically between 30 and 60 days during each turnaround by itself. However, the duration of a turnaround by itself may be longer than expected or may cost more than originally estimated.
We expect that each of OpCo's facilities will have a turnaround approximately once every five years and will not operate for typically between 30 and 60 days during each separate turnaround. However, the duration of any turnaround activities may be longer than expected or may cost more than originally estimated.
If Westlake is unable to generate sufficient cash flow from its operations to meet its obligations, or otherwise defaults on its obligations, under the Ethylene Sales Agreement, OpCo will not have sufficient available cash to distribute to us to enable us to pay the minimum quarterly distribution, which will fluctuate from quarter to quarter based on the following factors, some of which are beyond our control: • severe financial hardship or bankruptcy of Westlake or one of our other customers, or the occurrence of other events affecting our ability to collect payments from Westlake or our other customers, including any of our customers' default; • volatility and cyclical downturns in the chemicals industry and other industries which materially and adversely impact Westlake and our other customers; • Westlake's inability to perform, or any other default on its obligations, under the Ethylene Sales Agreement; • the age of, and changes in the reliability, efficiency and capacity of the various equipment and operating facilities used in OpCo's operations, and in the operations of Westlake and our other customers, business partners and/or suppliers; • the cost of environmental remediation at OpCo's facilities not covered by Westlake or third parties; • changes in the expected operating levels of OpCo's assets; • OpCo's ability to meet minimum volume requirements, yield standards and ethylene quality requirements in the Ethylene Sales Agreement; • OpCo's ability to renew the Ethylene Sales Agreement or to enter into new, long-term agreements for the sale of ethylene under terms similar or more favorable; 10 Table of Contents • changes in the marketplace that may affect supply and demand for ethane or ethylene, including decreased availability of ethane (which may result from greater restrictions on hydraulic fracturing, any reduction in hydraulic fracturing due to low crude oil prices or exports of natural gas liquids from the United States, for example), increased production of ethylene or export of ethane or ethylene from the United States; • changes in overall levels of production, production capacity, pricing and/or margins for ethylene; • OpCo's ability to secure adequate supplies of ethane, other feedstocks and natural gas from Westlake or third parties; • the need to use higher priced or less attractive feedstock due to the unavailability of ethane; • the effects of pipeline, railroad, barge, truck and other transportation performance and costs, including any transportation disruptions; • the availability and cost of labor; • risks related to employees and workplace safety; • the effects of adverse events relating to the operation of OpCo's facilities and to the transportation and storage of hazardous materials (including equipment malfunction, explosions, fires, spills and the effects of severe weather conditions); • changes in product specifications for the ethylene that we produce; • changes in insurance markets and the level, types and costs of coverage available, and the financial ability of our insurers to meet their obligations; • changes in, or new, statutes, regulations or governmental policies by federal, state and local authorities with respect to protection of the environment; • changes in accounting rules and/or tax laws or their interpretations; • nonperformance or force majeure by, or disputes with or changes in contract terms with, Westlake, our other major customers, suppliers, dealers, distributors or other business partners; and • changes in, or new, statutes, regulations, governmental policies and taxes, or their interpretations.
As a result, our ability to pay the minimum quarterly distribution is based on the following factors, some of which are beyond our control: • severe financial hardship or bankruptcy of Westlake or one of our other customers, or the occurrence of other events affecting our ability to collect payments from Westlake or our other customers, including any of our customers' default; • volatility and cyclical downturns in the chemicals industry and other industries which materially and adversely impact Westlake and our other customers; • Westlake's inability to perform, or any other default on its obligations, under the Ethylene Sales Agreement, the Services and Secondment Agreement and the Omnibus Agreement; • the age of, and changes in the reliability, efficiency and capacity of the various equipment and operating facilities used in OpCo's operations, and in the operations of Westlake and our other customers, business partners and/or suppliers; • the cost of environmental remediation at OpCo's facilities not covered by Westlake or third parties; • changes in the expected operating levels of OpCo's assets; • OpCo's ability to meet minimum volume requirements, yield standards and ethylene quality requirements in the Ethylene Sales Agreement; • OpCo's ability to renew the Ethylene Sales Agreement or to enter into new, long-term agreements for the sale of ethylene under terms that are similar or more favorable; 10 Table of Contents • changes in the marketplace that may affect supply and demand for ethane or ethylene, including decreased availability of ethane (which may result from greater restrictions on hydraulic fracturing, any reduction in hydraulic fracturing due to low crude oil prices or exports of natural gas liquids from the United States, for example), increased production of ethylene (a number of new ethylene capacity expansions have been recently completed) or export of ethane or ethylene from the United States; • changes in overall levels of production, production capacity, pricing and/or margins for ethylene; • OpCo's ability to secure adequate supplies of ethane, other feedstocks and natural gas from Westlake or third parties; • the need to use higher priced or less attractive feedstock due to the unavailability of ethane; • the effects of pipeline, railroad, barge, truck and other transportation performance and costs, including any transportation disruptions; • the effects of inflation and fluctuations in interest rates; • the availability and cost of labor; • risks related to employees and workplace safety; • the effects of adverse events relating to the operation of OpCo's facilities and to the transportation and storage of hazardous materials (including equipment malfunction, explosions, fires, spills and the effects of severe weather conditions); • changes in product specifications for the ethylene that we produce; • changes in insurance markets and the level, types and costs of coverage available, and the financial ability and willingness of our insurers to meet their obligations; • changes in, or new, statutes, regulations or governmental policies by federal, state and local authorities with respect to protection of the environment; • changes in accounting rules and/or tax laws or their interpretations; • nonperformance or force majeure by, or disputes with or changes in contract terms with, Westlake, our other major customers, suppliers, dealers, distributors or other business partners; and • changes in, or new, statutes, regulations, governmental policies and taxes, or their interpretations.
If Westlake were unable to meet its minimum payment obligations to OpCo as a result of any one or more of these factors, our ability to make distributions to our unitholders would be reduced or eliminated.
If Westlake is not able to meet its minimum payment obligations to OpCo as a result of any one or more of these factors, our ability to make distributions to our unitholders would be reduced or eliminated.
Members of the investment community are increasing their focus on ESG practices and disclosures by public companies, including practices and disclosures related to climate change and sustainability, D&I initiatives and heightened governance standards. As a result, we may continue to face increasing pressure regarding our ESG disclosures and practices.
Members of the investment community are increasing their focus on ESG practices and disclosures by public companies, including practices and disclosures related to climate change and sustainability, D&I initiatives and heightened governance standards. In March 2022, the SEC proposed enhanced climate-change disclosure requirements. As a result, we may continue to face increasing pressure regarding our ESG disclosures and practices.
Westlake has not agreed with us to limit its ability to incur indebtedness, pledge or sell assets or make investments, and we have no control over the amount of indebtedness Westlake incurs, the assets it pledges or sells or the investments it makes.
Westlake has not pledged any assets to us as security for the performance of its obligations. Westlake has not agreed with us to limit its ability to incur indebtedness, pledge or sell assets or make investments, and we have no control over the amount of indebtedness Westlake incurs, the assets it pledges or sells or the investments it makes.
We maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, but we cannot be fully insured against all potential hazards incident to our business, including losses resulting from war risks or terrorist acts.
Through Westlake, we maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, but we cannot be fully insured against all potential hazards incident to our business, including losses resulting from wars or terrorist acts, among other things.
Prior to our initial public offering, we requested and obtained a favorable private letter ruling from the IRS to the effect that, based on facts presented in the private letter ruling request, our income from the production, transportation, storage and marketing of ethylene and its co-products constitutes "qualifying income" within the meaning of Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code").
Based upon our current operations and current Treasury Regulations, we believe we satisfy the qualifying income requirement. 24 Table of Contents Prior to our initial public offering, we requested and obtained a favorable private letter ruling from the IRS to the effect that, based on facts presented in the private letter ruling request, our income from the production, transportation, storage and marketing of ethylene and its co-products constitutes "qualifying income" within the meaning of Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code").
Public health crises, pandemics and epidemics, such as the COVID-19 pandemic, could materially adversely affect Westlake's business, financial condition and results of operations. The COVID-19 pandemic at its peak resulted in authorities implementing numerous measures to try to contain the disease, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns, among others.
Public health crises, pandemics and epidemics, such as the COVID-19 pandemic, could materially adversely affect OpCo's business, financial condition and results of operations. Such events have resulted in and may again result in authorities implementing numerous measures to try to contain the disease, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns, among others.
In addition, the actual amount of cash we will have available for distribution will depend on other factors, including: • the amount of cash we or OpCo are able to generate from sales of ethylene, and associated co-products, to third parties, which will be impacted by changes in prices for ethane (or other feedstocks), natural gas, ethylene and co-products and lower prices of crude oil, such as those experienced from the third quarter of 2014 through 2020, and could be less than the margin we earn from ethylene sales to Westlake; • the level of capital expenditures we or OpCo make; • the cost of acquisitions; • construction costs; • fluctuations in our or OpCo's working capital needs; • our or OpCo's ability to borrow funds (including under our or OpCo's revolving credit facilities) and access capital markets; • our or OpCo's debt service requirements and other liabilities; • restrictions contained in our or OpCo's existing or future debt agreements; and • the amount of cash reserves established by our general partner.
In addition, the actual amount of cash we will have available for distribution will depend on other factors, including: • the amount of cash we or OpCo are able to generate from sales of ethylene, and associated co-products, to third parties, which will be impacted by changes in prices for ethane (or other feedstocks), natural gas, ethylene and co-products and lower prices of crude oil, new ethylene capacity expansions in North America (a number of which have been completed recently), and could be less than the margin we earn from ethylene sales to Westlake; • the level of capital expenditures we or OpCo make; • the cost of acquisitions; • construction costs; • fluctuations in our or OpCo's working capital needs; • our or OpCo's ability to borrow funds (including under our or OpCo's revolving credit facilities) and access capital markets; • our or OpCo's debt service requirements, including interest owed on variable rate debt, and other liabilities; • restrictions contained in our or OpCo's existing or future debt agreements; and • the amount of cash reserves established by our general partner.
In November 2019, the United States submitted formal notification to the United Nations that it intended to withdraw from the Paris Agreement. The withdrawal took effect in November 2020.
The United States signed the Paris Agreement in April 2016, and the Paris Agreement went into effect in November 2016. In November 2019, the United States submitted formal notification to the United Nations that it intended to withdraw from the Paris Agreement. The withdrawal took effect in November 2020.
Cyber-attacks could include, but are not limited to, ransomware attacks, malicious software, attempts to gain unauthorized access to our data and the unauthorized release, corruption or loss of our data and personal information, interruptions in communication, loss of our intellectual property or theft of our sensitive or proprietary technology, loss or damage to our data delivery systems, or other cybersecurity and infrastructure systems, including our property and equipment.
Cyber-attacks could include, but are not limited to, ransomware attacks, malicious software, attempts to gain unauthorized access to our systems or data or other electronic security breaches that could lead to disruptions in critical systems, unauthorized release, corruption or loss of data including protected information such as personal information of our employees, interruptions in communication, loss of our intellectual property or theft of our sensitive or proprietary technology, loss or damage to our data delivery systems, or other cybersecurity and infrastructure systems, including our property and equipment.
Sales by Westlake or other large holders of a substantial number of our common units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. 22 Table of Contents Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Sales by Westlake or other large holders of a substantial number of our common units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities.
Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a "qualifying income" requirement. Based upon our current operations and current Treasury Regulations, we believe we satisfy the qualifying income requirement.
Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a "qualifying income" requirement.
Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
Our operations are subject to the usual hazards associated with commodity chemical manufacturing and the related use, storage, transportation and disposal of feedstocks, products and wastes, including: • pipeline leaks and ruptures; • explosions; • fires; • severe weather and natural disasters; • mechanical failure; • unscheduled downtime; • labor difficulties; • transportation interruptions; • chemical spills; • discharges or releases of toxic or hazardous substances or gases; • storage tank leaks; • other environmental risks; and 15 Table of Contents • terrorist attacks.
Our operations are subject to the usual hazards associated with commodity chemical manufacturing and the related use, storage, transportation and disposal of feedstocks, products and wastes, including: • pipeline leaks and ruptures; • explosions; • fires; • severe weather and natural disasters; • long-term impacts of climate change; including rising sea levels and changes in weather patterns, such as drought and flooding; • mechanical failure; • unscheduled downtime; • labor difficulties; • transportation interruptions; • chemical spills; • discharges or releases of toxic or hazardous substances or gases; • storage tank leaks; • other environmental risks; and • terrorist attacks.
The issuance of additional common units or other equity interests of equal or senior rank will have the following effects: • our existing unitholders' proportionate ownership interest in us will decrease; • the amount of earnings per each unit may decrease; • the ratio of taxable income to distributions may increase; • the relative voting strength of each previously outstanding unit may be diminished; and • the market price of the common units may decline.
The issuance of additional common units or other equity interests of equal or senior rank will have the following effects: • our existing unitholders' proportionate ownership interest in us will decrease; • the amount of earnings per each unit may decrease; • the ratio of taxable income to distributions may increase; • the relative voting strength of each previously outstanding unit may be diminished; and • the market price of the common units may decline. 23 Table of Contents The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by Westlake or other large holders.
Any adverse developments at any of these facilities or sites could have a material adverse effect on our results of operations and therefore our ability to distribute cash to unitholders. • The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income. • If we are unable to make acquisitions from Westlake or third parties on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis. • Our operations and assets are subject to climate-related risks and uncertainties.
Any adverse developments at any of these facilities or sites could have a material adverse effect on our results of operations and therefore our ability to distribute cash to unitholders. • The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income. • If we are unable to make acquisitions from Westlake or third parties on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis. • Our operations and assets are subject to climate-related risks and uncertainties. • Our variable-rate debt exposes us to increases in interest rates, which could have a material impact on our financial position, results of operation and cash flows, and could reduce the price at which our common units trade. 8 Table of Contents Risks Relating to Our Partnership Structure Our General Partner • Westlake owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations.
For example, lower prices of crude oil, such as the prices experienced from the third quarter of 2014 through 2020 led to a reduction in the cost advantage for natural gas liquids-based ethylene derivatives in North America, such as Westlake's, as compared to naphtha-based ethylene derivatives. As a result, Westlake's margins and cash flows were negatively impacted.
For example, lower prices of crude oil could lead to a reduction in the cost advantage for natural gas liquids-based ethylene derivatives in North America, such as Westlake's, as compared to naphtha-based ethylene derivatives. As a result, Westlake's margins and cash flows could be negatively impacted during such period.
The price is not designed to allow OpCo to recover any capital expenditures related to expansion, or operational efficiency. The ethylene sales price also does not increase to cover our public partnership costs.
The price is not designed to allow OpCo to recover any capital expenditures related to expansion. The ethylene sales price also does not increase to cover our cost of debt or public partnership costs. All of these costs reduce our net operating profit.
We may be unable to access our and OpCo's revolving credit facilities when we do not have sufficient cash flows to pay cash distributions. 14 Table of Contents If we are unable to make acquisitions from Westlake or third parties on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.
If we are unable to make acquisitions from Westlake or third parties on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.
As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may be unable to pay cash distributions during periods when we record net income.
As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may be unable to pay cash distributions during periods when we record net income. We may be unable to access our and OpCo's revolving credit facilities when we do not have sufficient cash flows to pay cash distributions.
In addition, Westlake may compete with us for investment opportunities and may own an interest in entities that compete with us. Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and Westlake.
Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and Westlake.
The amount and timing of such reimbursements are determined by our general partner. Business Operations • Substantially all of OpCo's sales are generated at three facilities located at two sites.
The amount and timing of such reimbursements are determined by our general partner. • The impact and effects of public health crises, pandemics and epidemics could materially adversely affect OpCo's business, financial condition and results of operations. Business Operations • Substantially all of OpCo's sales are generated at three facilities located at two sites.
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state laws impose joint and several liability for the costs of remedial investigations and actions on the entities that are deemed responsible for a release of hazardous substances into the environment, including entities that have generated hazardous substances or arranged for their transportation or disposal, as well as the past and present owners and operators of disposal sites.
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state laws impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the waste, transported to or selected the disposal sites, and the past and present owners and operators of disposal sites.
Both of these costs reduce our net operating profit. 12 Table of Contents The fee structure of the Ethylene Sales Agreement may limit OpCo's ability to take advantage of favorable market developments in the future.
The fee structure of the Ethylene Sales Agreement may limit OpCo's ability to take advantage of favorable market developments in the future.
If OpCo were unable to reach agreement with Westlake on an extension or replacement of these agreements, then our ability to make distributions on our common units could be materially adversely affected and the value of our common units could decline.
If OpCo were unable to reach agreement with Westlake on an extension or replacement of these agreements, then our ability to make distributions on our common units could be materially adversely affected and the value of our common units could decline. 12 Table of Contents OpCo has the right to use the real property underlying Lake Charles Olefins and Calvert City Olefins pursuant to two, 50-year site lease agreements with Westlake.
A single-member conflicts committee would not have the benefit of discussion with, and input from, other independent directors. Westlake and other affiliates of our general partner may compete with us. Affiliates of our general partner, including Westlake, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us.
A single-member conflicts committee would not have the benefit of discussion with, and input from, other independent directors. 20 Table of Contents Westlake and other affiliates of our general partner may compete with us.
Westlake's employees, systems, networks, products, facilities and services remain potentially vulnerable to sophisticated cyber-assault, especially while certain employees are working remotely during the COVID-19 pandemic, and, as such, there can be no assurance that a system failure, network disruption or data security breach will not have a material adverse effect on our operations, business, financial condition, operating results or cash flow. 17 Table of Contents A terrorist attack or armed conflict could harm our business.
Westlake's and our employees, systems, networks, products, facilities and services remain potentially vulnerable to sophisticated cyber-attacks, including the additional cybersecurity risks posed by the increased use of remote networking technologies and services, and, as such, there can be no assurance that a system failure, network disruption or data security breach will not have a material adverse effect on our operations, business, financial condition, operating results or cash flow.
The level of payments made by Westlake will depend upon its ability to pay its minimum obligations under the Ethylene Sales Agreement and its ability and election to increase volumes above the minimums specified in the Ethylene Sales Agreement, which in turn are dependent upon, among other things, the level of production at Westlake's other facilities.
The amount paid by Westlake will depend upon its ability to satisfy its minimum obligations under the Ethylene Sales Agreement and its ability and election to increase volumes above the minimums specified in the Ethylene Sales Agreement, which in turn are dependent upon, among other things, the level of polyethylene and polyvinyl chloride production at Westlake's other facilities, as well as industry capacity expansion in these downstream products in North America, a number of which have been recently completed.
Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity. 23 Table of Contents If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate.
However, no ruling has been or will be requested regarding our treatment as a partnership for U.S. federal income tax purposes. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other jurisdictions could adversely affect the United States and global economies and could prevent us from meeting financial and other obligations.
A reduction in demand for our common units may cause their trading price to decline. A terrorist attack or armed conflict could harm our business. Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other jurisdictions could adversely affect the United States and global economies and could prevent us from meeting financial and other obligations.
The resulting Paris Agreement calls for the parties to undertake "ambitious efforts" to limit the average global temperature and to conserve and enhance sinks and reservoirs of greenhouse gases. The United States signed the Paris Agreement in April 2016, and the Paris Agreement went into effect in November 2016.
In December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake "ambitious efforts" to limit the average global temperature and to conserve and enhance sinks and reservoirs of greenhouse gases.
Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced.
If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to our unitholders.
As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.
In addition, certain policies may be subject to coverage limitations, which may affect the extent of any recovery thereunder. As a result of market conditions and past claims, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage.
There were widespread adverse impacts on the global economy, many of Westlake's facilities and its employees, customers and suppliers. We have also encountered supply chain constraints and disruptions and workforce availability issues as a result of COVID-19 related actions and vaccination requirements.
Such events have had and could again have widespread adverse impacts on the global economy, many of OpCo's facilities and its employees, customers and suppliers. These and similar events have caused and may again cause supply chain constraints and disruptions and workforce availability issues as well.
Our operations and assets are subject to extensive environmental, health and safety laws and regulations. We use hazardous substances and generate hazardous wastes and emissions in our manufacturing operations. Our industry is highly regulated and monitored by various environmental regulatory authorities such as the EPA.
Our industry is highly regulated and monitored by various environmental regulatory authorities such as the EPA.
Our partnership agreement provides that our general partner determines the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates reduce the amount of our earnings and, thereby, our ability to distribute cash to our unitholders.
Our partnership agreement provides that our general partner determines the expenses that are allocable to us.
If Westlake defaults on its obligations, our ability to make distributions to our unitholders would be reduced or eliminated. Westlake has not pledged any assets to us as security for the performance of its obligations.
Our ability to make distributions to unitholders is substantially dependent on Westlake's ability to meet its minimum contractual obligations under the Ethylene Sales Agreement and its obligations under the Services and Secondment Agreement and the Omnibus Agreement. If Westlake defaults on its obligations, our ability to make distributions to our unitholders would be reduced or eliminated.
The impact and effects of public health crises, pandemics and epidemics, including the ongoing coronavirus (COVID-19) pandemic, could materially adversely affect Westlake's business, financial condition and results of operations. Our ability to make distributions to unitholders is substantially dependent on Westlake's ability to meet its minimum contractual obligations under the Ethylene Sales Agreement.
The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates reduce the amount of our earnings and, thereby, our ability to distribute cash to our unitholders. 13 Table of Contents The impact and effects of public health crises, pandemics and epidemics could materially adversely affect OpCo's business, financial condition and results of operations.
The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by Westlake or other large holders. Westlake has registration rights with respect to the common units it holds.
Westlake has registration rights with respect to the common units it holds.
Information technology system failures, network disruptions and breaches of data security due to internal or external factors including cyber-attacks could disrupt our operations by causing delays or cancellation of customer orders, impede the manufacture or shipment of products or cause standard business processes to become ineffective, resulting in the unintentional disclosure of information or damage to our reputation.
We use these technologies for internal and operational purposes, including data storage, processing, and transmission, as well as in our interactions with our business associates, such as customers and suppliers. 17 Table of Contents Information technology system failures, network disruptions and breaches of data security due to internal or external factors including cyber-attacks could have material adverse impacts on our business or cause disruptions to our operations.
Removed
If Westlake does not pay us under the terms of the Ethylene Sales Agreement or if our assets fail to perform as intended, we may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders. • OpCo is subject to the credit risk of Westlake on a substantial majority of its revenues, and Westlake's leverage and creditworthiness could adversely affect our ability to make distributions to our unitholders.
Added
If Westlake is unable to generate sufficient cash flow from its operations to meet its obligations, or otherwise defaults on its obligations, under the Ethylene Sales Agreement, OpCo will not have sufficient available cash to distribute to us to enable us to pay the minimum quarterly distribution set forth in our cash distribution policy.
Removed
At the peak of the COVID-19 pandemic, Westlake, which provides us operating services, modified certain business practices (including those related to employee travel, employee work locations and employee work practices), to conform to government restrictions and best practices encouraged by governmental and regulatory authorities.
Added
If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position. 15 Table of Contents Our operations and assets are subject to extensive environmental, health and safety laws and regulations. We use hazardous substances and generate hazardous wastes and emissions in our manufacturing operations.
Removed
The ultimate extent of the impact of COVID-19 on Westlake's business, financial condition and results of operations will depend largely on future developments, including the resurgence and duration of COVID-19, the impact of governmental actions designed to prevent the spread of COVID-19 and the development, availability, timely distribution and acceptance of effective treatments and vaccines worldwide, all of which are highly uncertain and cannot be predicted with certainty at this time.
Added
On April 27, 2023, the EPA proposed amendments to the National Emission Standards for Hazardous Air Pollutants (NESHAPs) for ethylene production following the receipt of several petitions for reconsideration for the provisions addressing work practice standards for pressure relief devices, emergency flaring, and degassing of floating roof storage vessels.
Removed
OpCo has the right to use the real property underlying Lake Charles Olefins and Calvert City Olefins pursuant to two, 50-year site lease agreements with Westlake.
Added
In April 2023, the EPA proposed amendments to new source performance standards for the synthetic organic chemical manufacturing industry and amendments to the national emissions standards for hazardous air pollutants for the synthetic organic chemical manufacturing industry and group I & II polymers and resins industry.
Removed
Our operations also produce greenhouse gas ("GHG") emissions, which have been the subject of increased scrutiny and regulation. In December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France.
Added
These proposed amendments, among other things, would impose tougher emissions limits, additional leak detection and repair obligations, certain performance standards for the operation of flares at applicable facilities, and new fenceline air monitoring for several chemicals.
Removed
Failure to adequately protect critical data and technology systems could materially affect our operations.
Added
Although we cannot predict the outcome or timing of EPA's final rule amendments, the amendments as proposed would require us to incur further capital expenditures and increase operating costs. Our operations also produce greenhouse gas ("GHG") emissions, which have been the subject of increased scrutiny and regulation.
Removed
Westlake, which manages our security protocol under the omnibus agreement, has taken steps to address these risks by implementing network security and internal control measures, including employee training, comprehensive monitoring of our networks and systems, maintenance of backup and protective systems and disaster recovery and incident response plans.
Added
To measure progress towards this target, the Paris Agreement requires the parties to complete a global stocktake, assessing members' collective efforts and achievements in reducing GHG emissions and adapting to the impacts of climate change, every five years.
Removed
Risks Relating to Our Partnership Structure Our General Partner Westlake owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations.
Added
On December 13, 2023, the 28th annual United Nations Climate Change Conference ("COP 28"), which was held in Dubai, issued its first global stocktake, which calls on parties, including the United States, to contribute to the transitioning away from fossil fuels, reduce methane emissions, and increase renewable energy capacity, among other things, to achieve net zero emissions by 2050.
Removed
However, no ruling has been or will be requested regarding our treatment as a partnership for U.S. federal income tax purposes.
Added
We are subject to operational and financial risks and liabilities associated with the implementation of and efforts to achieve carbon emission reduction goals.
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Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
2 edited+1 added−1 removed1 unchanged
Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
2 edited+1 added−1 removed1 unchanged
2022 filing
2023 filing
Biggest changeBusiness — Environmental" and "Note 16 — Commitments and Contingencies", to the consolidated financial statements within this report.
Biggest changeBusiness — Environmental" and Note 16 to the consolidated financial statements included in Item 8 of this Form 10-K.
Item 3. Legal Proceedings In the ordinary conduct of our business, we and Westlake and Westlake's subsidiaries, including OpCo, are subject to periodic lawsuits, investigations and claims, including environmental claims and employee related matters. See the discussions of our environmental matters contained in "Item 1.
Item 3. Legal Proceedings In the ordinary conduct of our business, we and Westlake and Westlake's subsidiaries, including OpCo, are subject to lawsuits, investigations and claims, including environmental claims and employee related matters. See the discussions of our environmental matters contained in "Item 1.
Removed
In addition, under the Omnibus Agreement, Westlake agreed to indemnify OpCo for certain environmental liabilities arising out of or occurring before the closing date of the IPO.
Added
Under the Omnibus Agreement, certain subsidiaries of Westlake have agreed to indemnify the Partnership for certain environmental and other liabilities relating to OpCo's processing facilities and related assets that occurred or existed prior to August 4, 2014.
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
5 edited+1 added−1 removed14 unchanged
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
5 edited+1 added−1 removed14 unchanged
2022 filing
2023 filing
Biggest changeHowever, our general partner may in the future own common units or other equity interests in us and will be entitled to receive distributions on any such interests. Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the target distribution levels have been achieved.
Biggest changeIncentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the target distribution levels have been achieved. Westlake currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest.
In determining operating surplus and capital surplus, we will only take into account our proportionate share of our consolidated subsidiaries that are not wholly owned, such as OpCo. Minimum Quarterly Distribution On July 27, 2018, the partnership agreement was amended to revise the minimum quarterly distribution thresholds for the Partnership's incentive distribution rights.
In determining operating surplus and capital surplus, we will only take into account our proportionate share of our consolidated subsidiaries that are not wholly owned, such as OpCo. 31 Table of Contents Minimum Quarterly Distribution On July 27, 2018, the partnership agreement was amended to revise the minimum quarterly distribution thresholds for the Partnership's incentive distribution rights.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Partnership Interests Our common units are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "WLKP." As of the close of business on February 22, 2023, based upon information received from our transfer agent, there were four holders of record of our common units.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Partnership Interests Our common units are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "WLKP." As of the close of business on February 21, 2024, based upon information received from our transfer agent, there were four holders of record of our common units.
Unregistered Sales of Equity Securities We did not have any unregistered sales of equity securities during the quarter or fiscal year ended December 31, 2022 that we have not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K. Issuer Purchases of Equity Securities None. 30 Table of Contents
Unregistered Sales of Equity Securities We did not have any unregistered sales of equity securities during the quarter or fiscal year ended December 31, 2023 that we have not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K. Issuer Purchases of Equity Securities None. 32 Table of Contents
For more information on the Partnership's amended distribution allocation percentages, see Note 9, "Distributions and Net Income Per Limited Partner Unit," to the consolidated financial statements within this report. 29 Table of Contents General Partner Interests and Incentive Distribution Rights Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions.
For more information on the Partnership's amended distribution allocation percentages, see Note 9, "Distributions and Net Income Per Limited Partner Unit," to the consolidated financial statements included in Item 8 of this form 10-K.
Removed
Westlake currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest.
Added
General Partner Interests and Incentive Distribution Rights Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity interests in us and will be entitled to receive distributions on any such interests.
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
60 edited+9 added−33 removed68 unchanged
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
60 edited+9 added−33 removed68 unchanged
2022 filing
2023 filing
Biggest changeReconciliations for each of MLP distributable cash flow and EBITDA are included below. 35 Table of Contents Reconciliation of MLP Distributable Cash Flow to Net Income and Net Cash Provided by Operating Activities Year Ended December 31, 2022 2021 2020 (dollars in thousands) Net cash provided by operating activities $ 463,736 $ 408,439 $ 373,397 Loss from disposition of property, plant and equipment (4,707) (4,198) (1,000) Changes in operating assets and liabilities and other (124,200) (2,856) (31,278) Net income 334,829 401,385 341,119 Add: Depreciation, amortization and disposition of property, plant and equipment 125,781 113,032 104,154 Mark-to-market adjustment gain on derivative contracts — — (1,340) Less: Contribution to turnaround reserves (29,175) (80,090) (39,937) Maintenance capital expenditures (45,249) (87,783) (37,343) Distributable cash flow attributable to noncontrolling interest in OpCo (310,316) (276,487) (294,670) MLP distributable cash flow $ 75,870 $ 70,057 $ 71,983 Reconciliation of EBITDA to Net Income, Income from Operations and Net Cash Provided by Operating Activities Year Ended December 31, 2022 2021 2020 (dollars in thousands) Net cash provided by operating activities $ 463,736 $ 408,439 $ 373,397 Loss from disposition of property, plant and equipment (4,707) (4,198) (1,000) Changes in operating assets and liabilities and other (124,200) (2,856) (31,278) Net income 334,829 401,385 341,119 Less: Other income, net 1,566 62 733 Interest expense—Westlake (13,407) (8,816) (12,038) Provision for income taxes (1,017) (549) (564) Income from operations 347,687 410,688 352,988 Add: Depreciation and amortization 121,074 108,814 103,154 Other income, net 1,566 62 733 EBITDA $ 470,327 $ 519,564 $ 456,875 36 Table of Contents Summary For the year ended December 31, 2022, net income was $334.8 million on net sales of $1,593.1 million.
Biggest changeYear Ended December 31, 2023 2022 2021 (in thousands of dollars) Net cash provided by operating activities $ 451,999 $ 463,736 $ 408,439 Loss from disposition of property, plant and equipment (4,933) (4,707) (4,198) Changes in operating assets and liabilities and other (112,440) (124,200) (2,856) Net income 334,626 334,829 401,385 Add: Depreciation, amortization and disposition of property, plant and equipment 115,136 125,781 113,032 Less: Contribution to turnaround reserves (29,520) (29,175) (80,090) Maintenance capital expenditures (49,212) (45,249) (87,783) Distributable cash flow attributable to noncontrolling interest in OpCo (308,456) (310,316) (276,487) MLP distributable cash flow $ 62,574 $ 75,870 $ 70,057 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.
The OpCo Revolver Amendment, among other things, extended the maturity date of the OpCo Revolver to July 12, 2027 and provided for the replacement of the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate, as administered by the Federal Reserve Bank of New York ("SOFR").
The OpCo Revolver Amendment, among other things, extended the maturity date to July 12, 2027 and provided for the replacement of the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate, as administered by the Federal Reserve Bank of New York ("SOFR").
Although Westlake 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. 32 Table of Contents 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.
Although Westlake 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. 34 Table of Contents 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.
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%.
Borrowings under the OpCo Revolver 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%.
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%.
Borrowings under the MLP Revolver 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 Shortfall is generally recognized during the period in which the related operating, maintenance or turnaround activities occur. 31 Table of Contents 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 charge Westlake a monthly surcharge following efforts to mitigate the effects of such compliance.
The Shortfall is generally recognized during the period in which the related operating, maintenance or turnaround activities occur. 33 Table of Contents 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 charge Westlake a monthly surcharge following efforts to mitigate the effects of such compliance.
We settled all derivatives in 2020 and did not enter into any new derivative arrangements during 2021 or 2022; however, we may enter into derivative arrangements in the future. Goodwill impairment.
We settled all derivatives in 2020 and did not enter into any new derivative arrangements during 2021, 2022 or 2023; however, we may enter into derivative arrangements in the future. Goodwill impairment.
At December 31, 2022, recorded goodwill was $5.8 million, all of which was associated with the acquisition of the Longview Pipeline as part of the past acquisition of Westlake's Longview production facilities. We perform our annual impairment assessment in the fourth quarter. We may elect to perform an optional qualitative assessment to determine whether a quantitative impairment analysis is required.
At December 31, 2023, recorded goodwill was $5.8 million, all of which was associated with the acquisition of the Longview Pipeline as part of the past acquisition of Westlake's Longview production facilities. We perform our annual impairment assessment in the fourth quarter. We may elect to perform an optional qualitative assessment to determine whether a quantitative impairment analysis is required.
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 2022, and such assessment did not indicate impairment of the goodwill.
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 2023, and such assessment did not indicate impairment of the goodwill.
The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default. As of December 31, 2022, the 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.
The repayment of borrowings under the MLP Revolver is subject to acceleration upon the occurrence of an event of default. As of December 31, 2023, the 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.
Reconciliations for each of MLP distributable cash flow and EBITDA are included in the "—Results of Operations" section below. 33 Table of Contents 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.
Reconciliations for each of MLP distributable cash flow and EBITDA are included in the "—Results of Operations" section below. 35 Table of Contents 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.
On January 23, 2023, the board of directors of Westlake Chemical Partners GP LLC, our general partner, approved a quarterly distribution of $0.4714 per unit payable on February 16, 2023 to unitholders of record on February 2, 2023, 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 on December 31, 2022.
On January 22, 2024, the board of directors of Westlake Chemical Partners GP LLC, our general partner, approved a quarterly distribution of $0.4714 per unit payable on February 20, 2024 to unitholders of record as of February 2, 2024, 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 on December 31, 2023.
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. 39 Table of Contents The Partnership maintains separate bank accounts, but Westlake continues to provide treasury services on our behalf under the Services and Secondment Agreement.
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 Omnibus Agreement.
As described above, we, OpCo and Westlake are parties to an Investment Management Agreement that authorizes Westlake to invest the Partnership's and OpCo's excess cash with Westlake for durations of up to a maximum of nine months. The Partnership had $65.0 million of cash invested under the Investment Management Agreement at December 31, 2022.
As described above, we, OpCo and Westlake are parties to an Investment Management Agreement that authorizes Westlake to invest the Partnership's and OpCo's excess cash with Westlake for durations of up to a maximum of nine months. The Partnership had $94.4 million of cash invested under the Investment Management Agreement at December 31, 2023.
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 of December 31, 2022, we had $27.6 million of enforceable and legally binding purchase commitments due within the near term, and none due over the long-term period.
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 of December 31, 2023, we had $69.8 million of enforceable and legally binding purchase commitments due within the near term, and none due over the long-term period.
On July 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 to July 12, 2027 and provided for the replacement of LIBOR with SOFR as the reference rate.
On July 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 to July 12, 2027 and provided for the replacement of LIBOR with SOFR as the reference rate.
During 2022, all third-party ethylene and associated co-products sales generated 15.7% of our total revenues. Under the Services and Secondment Agreement, OpCo uses a portion of its production capacity to process purge gas for Westlake.
During 2023, all third-party ethylene and associated co-products sales generated 13.8% of our total revenues. Under the Services and Secondment Agreement, OpCo uses a portion of its production capacity to process purge gas for Westlake.
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 of December 31, 2022 .
The Partnership intends to use the net proceeds of sales of the common units, if any, for general partnership purposes, which may include the funding of potential drop-downs and other acquisitions. No common units had been issued under the ATM Program as of December 31, 2023 .
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.
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 consolidated financial statements included in Item 8 of this form 10-K. Fair Value Estimates.
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.
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 in the Notes to Consolidated Financial Statements in Item 8 of this form 10-K.
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 from Westlake Petrochemicals LLC. Please refer to Note 2 to the consolidated financial statements included within this report for more information on the Feedstock Supply Agreement.
For its approximately 5% merchant sales, OpCo may purchase the ethane and other feedstocks to produce ethylene and resulting co-products to sell to unrelated third parties from Westlake Petrochemicals LLC. Please refer to Note 2 to the consolidated financial statements included in Item 8 of this form 10-K for more information on the Feedstock Supply Agreement.
As of December 31, 2022, we had $19.2 million of debt related interest expense due within the near term, and debt obligations of $399.7 million and related interest expense of $67.8 million due over the long-term period, respectively. All $399.7 million of our outstanding debt matures in 2027.
Debt Obligations and Interest Payments. As of December 31, 2023, we had $29.0 million of debt related interest expense due within the near term, and debt obligations of $399.7 million and related interest expense of $73.2 million due over the long-term period, respectively. All $399.7 million of our outstanding debt matures in 2027.
Other income, net increased by $1.5 million to $1.6 million in 2022 from $0.1 million in 2021, primarily due to an increase in interest income earned under the Investment Management Agreement. Provision for Income Taxes. Provision for income taxes was $1.0 million in 2022 as compared to $0.5 million in 2021. MLP Distributable Cash Flow.
Other income, net increased by $2.6 million to $4.2 million in 2023 from $1.6 million in 2022 primarily due to an increase in interest earned on the balance with Westlake under the Investment Management Agreement. Provision for Income Taxes. Provision for income taxes was $0.8 million in 2023 as compared to $1.0 million in 2022. MLP Distributable Cash Flow.
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 $9.5 million in 2022 as compared to $25.6 million of cash provided in 2021, resulting in an unfavorable change of $16.1 million.
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 $34.4 million in 2023 as compared to $9.5 million of cash provided in 2022, resulting in a favorable change of $24.9 million.
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.
See Note 8, "Long-Term Debt," in the Notes to Consolidated Financial Statements in Item 8 of this form 10-K for further information on our debt obligations and the expected timing of future principal and interest payments. Operating leases.
Cash and Cash Equivalents As of December 31, 2022, our cash and cash equivalents totaled $64.8 million. In addition, we have cash invested under the Investment Management Agreement and a revolving credit facility with Westlake available to supplement cash on hand, if needed, as described under "Indebtedness" below.
In addition, we have cash invested under the Investment Management Agreement and a revolving credit facility with Westlake available to supplement cash on hand, if needed, as described under "Indebtedness" below.
Interest expense increased by $4.6 million to $13.4 million in 2022 from $8.8 million in 2021, largely due to a higher interest rate on debt owed to Westlake. Other Income, net.
Interest expense increased by $13.1 million to $26.5 million in 2023 from $13.4 million in 2022 due to a higher interest rate on debt owed to Westlake. Other Income, net.
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.
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.
Cash Flows Operating Activities Operating activities provided cash of $463.7 million in 2022 as compared to cash provided by operating activities of $408.4 million in 2021.
Cash Flows Operating Activities Operating activities provided cash of $452.0 million in 2023 as compared to cash provided by operating activities of $463.7 million in 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. No such funding was required by OpCo during 2022, 2021 or 2020.
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. 40 Table of Contents Capital Expenditures Westlake has historically funded expansion capital expenditures related to Lake Charles Olefins and Calvert City Olefins.
Please refer to Note 2 to the consolidated financial statements included within this report for more information on the Ethylene Sales Agreement.
Please refer to Note 2 to the consolidated financial statements included in Item 8 of this form 10-K for more information on the Ethylene Sales Agreement.
Our more critical accounting estimates include those related to long-lived assets, intangible 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.
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.
Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $121.1 million, $108.8 million and $103.2 million in 2022, 2021 and 2020, respectively. If the useful lives of the assets were found to be shorter than originally estimated, depreciation or amortization charges would be accelerated.
Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $110.2 million, $121.1 million and $108.8 million in 2023, 2022 and 2021, respectively.
This represents a decrease in net income of $66.6 million as compared to net income of $401.4 million on net sales of $1,214.9 million for the year ended December 31, 2021. Net income attributable to the Partnership in 2022 was $64.2 million as compared to $82.5 million in 2021, a decrease of $18.3 million.
This represents a decrease in net income of $0.2 million as compared to net income of $334.8 million on net sales of $1,593.1 million for the year ended December 31, 2022. Net income attributable to the Partnership in 2023 was $54.3 million as compared to $64.2 million in 2022, a decrease of $9.9 million.
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 the U.S. and world economies, the cyclical nature of the chemical and refining industries and uncertainties associated with governmental actions. 41 Table of Contents 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.
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 the U.S. and world economies, the cyclical nature of the chemical and refining industries and uncertainties associated with governmental actions.
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.
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 cash outflows during 2022 were related to distributions of $337.6 million to Westlake and of $66.4 million to other unitholders by the Partnership. 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.
Financing Activities Net cash used for financing activities during 2023 was $382.2 million as compared to net cash used for financing activities of $404.0 million in 2022. The cash outflows during 2023 were related to distributions of $315.8 million to the noncontrolling interest retained in OpCo by Westlake and of $66.4 million to unitholders by the Partnership.
The $52.3 million decrease in cash used for investing activities was mainly due to maturities of investments under the Investment Management Agreement in 2022 as compared to 2021. During 2022, we invested $319.9 million with Westlake, and $362.0 million of such investments matured. Capital expenditures were $54.1 million in 2022 as compared to $81.2 million in 2021.
The $63.9 million increase in cash used for investing activities was mainly due to an increase in net cash invested under the Investment Management Agreement in 2023 as compared to 2022. During 2023, we invested $174.1 million with Westlake, and $145.0 million of such investments matured.
The increase in net sales in 2022 was primarily due to higher co-products sales prices and volumes and higher ethylene sales prices due to higher ethane feedstock costs and natural gas prices and volumes to Westlake, partially offset by lower ethylene sales prices to third parties.
The increased EBITDA, as compared to the prior year, was primarily due to lower ethane feedstock and natural gas costs in 2023 as compared to 2022, partially offset by lower ethylene and co-products sales prices.
Business — Environmental" and in Note 16 to the consolidated financial statements included within this report. 42 Table of Contents 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.
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.
Year Ended December 31, 2022 2021 2020 (in thousands of dollars, except unit amounts and per unit data) Net sales—Westlake $ 1,342,910 $ 1,026,586 $ 888,245 Net co-products, ethylene and other sales—third parties 250,237 188,272 78,425 Total net sales 1,593,147 1,214,858 966,670 Gross profit 377,365 441,706 378,883 Selling, general and administrative expenses 29,678 31,018 25,895 Income from operations 347,687 410,688 352,988 Other income (expense) Interest expense—Westlake (13,407) (8,816) (12,038) Other income, net 1,566 62 733 Income before income taxes 335,846 401,934 341,683 Provision for income taxes 1,017 549 564 Net income 334,829 401,385 341,119 Less: Net income attributable to noncontrolling interest in OpCo 270,656 318,838 274,952 Net income attributable to Westlake Chemical Partners LP and limited partners' interest in net income $ 64,173 $ 82,547 $ 66,167 Net income attributable to Westlake Chemical Partners LP per limited partner unit (basic and diluted) Common units $ 1.82 $ 2.34 $ 1.88 Weighted average limited partner units outstanding (basic and diluted) Common units—publicly and privately held 21,095,106 21,084,103 21,073,041 Common units—Westlake 14,122,230 14,122,230 14,122,230 MLP distributable cash flow (1) $ 75,870 $ 70,057 $ 71,983 EBITDA (1) $ 470,327 $ 519,564 $ 456,875 Year Ended December 31, 2022 2021 Average Sales Price Volume Average Sales Price Volume Product sales price and volume percentage change from prior year +20.3 % +21.8 % +26.8% -3.6 % Year Ended December 31, 2022 2021 Domestic US prices percentage change from prior-year period for fuel cost and feedstock Fuel cost (Natural Gas) +67 % +86 % Feedstock (Ethane) +56 % +63 % ______________________________ (1) See above for discussions on non-GAAP financial measures.
Year Ended December 31, 2023 2022 (in thousands of dollars, except unit amounts and per unit data) Net sales—Westlake $ 1,026,655 $ 1,342,910 Net co-products, ethylene and other sales—third parties 164,136 250,237 Total net sales 1,190,791 1,593,147 Gross profit 387,459 377,365 Selling, general and administrative expenses 29,751 29,678 Income from operations 357,708 347,687 Other income (expense) Interest expense—Westlake (26,501) (13,407) Other income, net 4,232 1,566 Income before income taxes 335,439 335,846 Provision for income taxes 813 1,017 Net income 334,626 334,829 Less: Net income attributable to noncontrolling interest in OpCo 280,343 270,656 Net income attributable to Westlake Chemical Partners LP and limited partners' interest in net income $ 54,283 $ 64,173 Net income per limited partner unit attributable to Westlake Chemical Partners LP (basic and diluted) Common units $ 1.54 $ 1.82 Weighted average limited partner units outstanding (basic and diluted) Common units—publicly and privately held 21,102,110 21,095,106 Common units—Westlake 14,122,230 14,122,230 MLP distributable cash flow (1) $ 62,574 $ 75,870 EBITDA (1) $ 472,143 $ 470,327 Year Ended December 31, 2023 2022 Average Sales Price Volume Average Sales Price Volume Net sales percentage change from prior-year period due to average sales price and volume -25.5 % +1.4 % +20.3% +21.8% Year Ended December 31, 2023 2022 Domestic US prices percentage change from prior-year period for fuel cost and feedstock Fuel cost (Natural Gas) -58.5 % +66.7 % Feedstock (Ethane) -48.8 % +55.8 % ______________________________ (1) See above for discussions on non-GAAP financial measures.
Amortization in 2022, 2021 and 2020 of previously deferred turnaround costs was $26.0 million, $16.5 million and $11.8 million, respectively. As of December 31, 2022, deferred turnaround costs, net of accumulated amortization, totaled $127.6 million.
Total costs deferred on turnarounds were $30.9 million, $6.7 million and $131.2 million in 2023, 2022 and 2021, respectively. Amortization of previously deferred turnaround costs was $25.4 million, $26.0 million and $16.5 million in 2023, 2022 and 2021, respectively. As of December 31, 2023, deferred turnaround costs, net of accumulated amortization, totaled $133.2 million.
Total capital expenditures for the years ended December 31, 2022, 2021 and 2020 were $54.1 million, $81.2 million, and $37.0 million, respectively. We expect that Westlake will loan additional cash to OpCo to fund its expansion capital expenditures in the future, but Westlake is under no obligation to do so.
We expect that Westlake will loan additional cash to OpCo to fund its expansion capital expenditures in the future, but Westlake is under no obligation to do so. Cash and Cash Equivalents As of December 31, 2023, our cash and cash equivalents totaled $58.6 million.
As of December 31, 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. 40 Table of Contents MLP Revolver In 2015, we entered into a senior, unsecured revolving credit agreement with an affiliate of Westlake, as amended in August and November 2017, March 2020 and July 2022 (the "MLP Revolver").
As of December 31, 2023, outstanding borrowings under the OpCo Revolver totaled $22.6 million and bore interest at SOFR plus the Applicable Margin and credit spread adjustment, which is accrued in arrears quarterly.
The cash outflows during 2021 were related to distributions of $277.9 million to Westlake and of $66.4 million to other unitholders by the Partnership. The cash outflows during 2020 were related to distributions of $311.8 million to Westlake and of $66.4 million to other unitholders by the Partnership.
The cash outflows during 2022 were related to distributions of $337.6 million to the noncontrolling interest retained in OpCo by Westlake and of $66.4 million to unitholders by the Partnership.
These unfavorable changes were partially offset by a favorable change in net accounts receivable—Westlake due to the collections of the 2021 buyer deficiency fee and a significant portion of the 2021 Shortfall during 2022. 38 Table of Contents Operating activities provided cash of $408.4 million in 2021 as compared to cash provided by operating activities of $373.4 million in 2020.
These favorable changes were partially offset by an unfavorable change in net accounts receivable—Westlake due to fluctuating ethane feedstock costs and a smaller buyer deficiency fee and Shortfall collected in 2023 compared to 2022. 39 Table of Contents Investing Activities Net cash used for investing activities during 2023 was $75.9 million as compared to net cash used for investing activities of $12.0 million in 2022.
Gross Profit . Gross profit was $377.4 million in 2022, as compared to gross profit of $441.7 million in 2021. The gross profit margin was 23.7% in 2022 as compared to 36.4% in 2021.
Higher sales volumes in 2023 contributed to a 1.4% increase in net sales compared to 2022. Gross Profit . Gross profit was $387.5 million in 2023, as compared to gross profit of $377.4 million in 2022. The gross profit margin was 32.5% in 2023 as compared to 23.7% in 2022.
The MLP Revolver has a borrowing capacity of $600.0 million and is scheduled to mature on July 12, 2027. On July 12, 2022, the Partnership entered into the Fourth Amendment (the "MLP Revolver Amendment") to the MLP Revolver.
MLP Revolver In 2015, we entered into a senior, unsecured revolving credit agreement with an affiliate of Westlake, as amended in August and November 2017, March 2020 and July 2022 (the "MLP Revolver"). The MLP Revolver has a borrowing capacity of $600.0 million and is scheduled to mature on July 12, 2027.
Recent Developments On July 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").
On July 12, 2022, OpCo entered into the Second Amendment (the "OpCo Revolver Amendment") to the OpCo Revolver.
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. Financing Activities Net cash used for financing activities during 2022 was $404.0 million as compared to net cash used for financing activities of $344.2 million in 2021.
During 2022, we invested $319.9 million with Westlake, and $362.0 million of such investments matured. Capital expenditures were $46.8 million in 2023 as compared to $54.1 million in 2022. Capital expenditures during 2023 and 2022 were related to projects to improve production capacity or reduce costs, maintenance and safety and environmental projects at our facilities.
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 (2024 and thereafter) include repayment of long-term debt, interest payments and purchase obligations. Debt Obligations and Interest Payments.
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 partnership purposes. 41 Table of Contents 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 (2025 and thereafter) include repayment of long-term debt, interest payments, operating leases and purchase obligations.
The $55.3 million increase in cash flows from operating activities was mainly due to OpCo's Petro 2 facility turnaround activities in 2021, partially offset by a decrease in net income and in cash provided by working capital.
The $11.7 million decrease in cash flows from operating activities was mainly due to cash used for the Calvert City Olefins turnaround activity and higher interest expense, which was partially offset by an increase in cash provided by working capital.
This change in 2022 as compared to 2021 was primarily due to decreases in accounts payable—third parties and accrued and other liabilities due to the 2022 payment of 2021 accruals related to the Petro 2 turnaround activities that occurred in 2021, as well as increases in accounts receivable—third parties due to higher sales in 2022 resulting from the Petro 2 turnaround in the second half of 2021.
The favorable change in working capital was mainly attributable to a favorable change in accounts receivable—third parties, accounts payable—third parties and accrued and other liabilities, primarily due to the timing of payment of accruals and the impact on accounts receivable of the Petro 2 turnaround activities in 2021, which impacted the changes in working capital during 2022.
In addition, the buyer deficiency fee of $23.8 million recognized in 2022 was lower than the buyer deficiency fee and Shortfall of $110.3 million recognized in 2021. T he higher average sales prices in 2022 contributed to a 20.3% increase in net sales compared to 2021.
The decrease in net sales in 2023 was primarily due to lower ethylene and co-products sales prices in 2023 as compared to 2022. Additionally, net sales in 2022 includes a buyer deficiency fee of $23.8 million. Lower average sales prices in 2023 contributed to a 25.5% decrease in net sales compared to 2022.
Additional information about certain legal proceedings and environmental matters appears in "Item 1.
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 in Item 8 of this form 10-K.
MLP distributable cash flow increased by $5.8 million to $75.9 million in 2022 from $70.1 million in 2021. The increase in MLP distributable cash flow was primarily a result of decreased turnaround reserves and maintenance capital expenditures, partially offset by lower earnings at OpCo. EBITDA.
MLP distributable cash flow decreased by $13.3 million to $62.6 million in 2023 from $75.9 million in 2022. The decrease in MLP distributable cash flow was primarily a result of higher interest expense. EBITDA. EBITDA increased by $1.8 million to $472.1 million in 2023 from EBITDA of $470.3 million in 2022.
The decreased gross profit margin in 2022 was primarily due to increased ethane feedstock costs and natural gas prices, lower third party ethylene sales prices and the larger buyer deficiency fee and Shortfall recognized during 2021. Selling, General and Administrative Expenses .
The increased gross profit margin in 2023 was primarily due to lower ethane feedstock and natural gas costs in 2023 as compared to 2022. Selling, General and Administrative Expenses . Selling, general and administrative expenses remained relatively unchanged at $29.8 million in 2023 as compared to $29.7 million in 2022. Interest Expense—Westlake .
Net sales for 2022 increased by $378.2 million as compared to 2021 mainly due to higher co-products sales prices and volumes and higher ethylene sales prices due to higher ethane feedstock costs and natural gas prices and volumes to Westlake pursuant to the terms of the Ethylene Sales Agreement, partially offset by lower ethylene sales prices to third parties and the smaller buyer deficiency fee recognized in 2022 as compared to the buyer deficiency fee and Shortfall recognized in 2021. 2022 Compared with 2021 Net Sales .
Income from operations for 2023 increased compared to 2022 due to lower ethane feedstock and natural gas costs, partially offset by lower ethylene and co-products sales prices.
The decrease in income from operations, as well as net income and net income attributable to the Partnership, was primarily due to increased ethane feedstock costs and natural gas prices, lower ethylene sales prices to third parties and a decrease in the buyer deficiency fee and Shortfall in 2022 as compared to 2021.
Income from operations was $357.7 million for 2023, as compared to $347.7 million for 2022. Net sales for 2023 decreased by $402.3 million as compared to 2022 primarily due to lower ethylene and co-products sales prices in 2023 compared to 2022. Additionally, net sales in 2022 includes a buyer deficiency fee of $23.8 million.
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 $6.7 million, $131.2 million and $3.7 million in 2022, 2021 and 2020, respectively.
If the useful lives of the assets were found to be shorter than originally estimated, depreciation or amortization charges would be accelerated. 42 Table of Contents 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.
Removed
The Applicable Margin under the MLP Revolver varies between 1.75% and 2.75%, depending on the Partnership's Consolidated Leverage Ratio. 34 Table of Contents Results of Operations The table below and descriptions that follow represent the consolidated results of operations of the Partnership for the years ended December 31, 2022, 2021 and 2020.
Added
Recent Development Calvert City Olefins Turnaround During May 2023, we performed our planned major maintenance activities, or turnaround, of OpCo's Calvert City Olefins production facility located at Westlake's Calvert City, Kentucky site. 36 Table of Contents Results of Operations The table below and descriptions that follow represent the consolidated results of operations of the Partnership for the years ended December 31, 2023 and 2022.
Removed
Income from operations was $347.7 million for 2022, as compared to $410.7 million for 2021.
Added
A detailed comparison of the Partnership's 2022 operating results to its 2021 operating results can be found in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in the Partnership's 2022 Annual Report on Form 10-K filed March 1, 2023.
Removed
The buyer deficiency fee was $23.8 million in 2022 as co mpared to a buyer deficiency fee and Shortfall of $110.3 million in 2021 . These decreases we re partially offs et by higher ethylene sales prices and volumes to Westlake pursuant to the terms of the Ethylene Sales Agreement and higher co-products sales prices and volumes in 2022.
Added
Reconciliations for each of MLP distributable cash flow and EBITDA are included below. 37 Table of Contents 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.
Removed
The higher production in 2022 as compared to 2021 was due to OpCo's Petro 2 turnaround and the force majeure events in 2021.
Added
Year Ended December 31, 2023 2022 2021 (in thousands of dollars) Net cash provided by operating activities $ 451,999 $ 463,736 $ 408,439 Loss from disposition of property, plant and equipment (4,933) (4,707) (4,198) Changes in operating assets and liabilities and other (112,440) (124,200) (2,856) Net income 334,626 334,829 401,385 Less: Other income, net 4,232 1,566 62 Interest expense—Westlake (26,501) (13,407) (8,816) Provision for income taxes (813) (1,017) (549) Income from operations 357,708 347,687 410,688 Add: Depreciation and amortization 110,203 121,074 108,814 Other income, net 4,232 1,566 62 EBITDA $ 472,143 $ 470,327 $ 519,564 38 Table of Contents Summary For the year ended December 31, 2023, net income was $334.6 million on net sales of $1,190.8 million.
Removed
Net sales increased by $378.2 million, or 31.1%, to $1,593.1 million in 2022 from $1,214.9 million in 2021.
Added
Net income and net income attributable to the Partnership for 2023 decreased as compared to 2022 despite the higher income from operations due to higher interest expense. 2023 Compared with 2022 Net Sales . Net sales decreased by $402.3 million, or 25.3%, to $1,190.8 million in 2023 from $1,593.1 million in 2022.
Removed
The higher sales volumes during 2022 contributed to an increase in net sales of 21.8% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in sales volume during 2022 was primarily due to higher production resulting in increased co-products sales volumes as well as higher ethylene sales volumes to Westlake.
Added
No such funding was required by OpCo during 2023, 2022 or 2021. Total capital expenditures for the years ended December 31, 2023, 2022 and 2021 were $46.8 million, $54.1 million, and $81.2 million, respectively.
Removed
Selling, general and administrative expenses decreased by $1.3 million, or 4.2%, to $29.7 million in 2022 from $31.0 million in 2021. The decrease in 2022, as compared to 2021, was mainly attributable to lower service costs. Interest Expense—Westlake .
Added
As of December 31, 2023, there was $1.6 million in operating lease obligations due within the near term and $3.1 million due over the long-term period related to noncancelable operating leases with respect to rail cars that are subleased to OpCo. Purchase Obligations.
Removed
EBITDA decreased by $49.3 million to $470.3 million in 2022 from EBITDA of $519.6 million in 2021.
Added
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.
Removed
The decreased EBITDA, as compared to the prior year, was primarily due to increased ethane feedstock costs and natural gas prices, lower ethylene sales prices to third parties, and a decrease in the buyer deficiency fee and Shortfall in 2022 compared to 2021, partially offset by higher ethylene sales to Westlake and higher co-products sales in 2022. 37 Table of Contents 2021 Compared with 2020 Net Sales .
Added
Recent Accounting Pronouncements See Note 1 to the consolidated financial statements included in Item 8 of this form 10-K 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. 43 Table of Contents
Removed
Net sales increased by $248.2 million, or 25.7%, to $1,214.9 million in 2021 from $966.7 million in 2020.
Removed
The increase in net sales in 2021 was primarily due to the higher sales price to third parties and Westlake pursuant to 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 .
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
6 edited+0 added−0 removed4 unchanged
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
6 edited+0 added−0 removed4 unchanged
2022 filing
2023 filing
Biggest changeAll derivative positions were settled as of December 31, 2020 and we did not enter into any new derivative contracts during 2021 or 2022. Interest Rate Risk We are exposed to interest rate risk with respect to our outstanding debt, all of which is variable rate debt.
Biggest changeAll derivative positions were settled as of December 31, 2020 and we did not enter into any new derivative contracts during 2021, 2022 or 2023. Interest Rate Risk We are exposed to interest rate risk with respect to our outstanding debt, all of which is variable rate debt.
As of December 31, 2022, we had variable rate debt of $399.7 million outstanding, all of which was owed to wholly-owned subsidiaries of Westlake. On July 12, 2022, OpCo entered into the OpCo Revolver Amendment. The OpCo Revolver Amendment, among other things, provided for the replacement of LIBOR with SOFR as the reference rate.
As of December 31, 2023, we had variable rate debt of $399.7 million outstanding, all of which was owed to wholly-owned subsidiaries of Westlake. On July 12, 2022, OpCo entered into the OpCo Revolver Amendment. The OpCo Revolver Amendment, among other things, provided for the replacement of LIBOR with SOFR as the reference rate.
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%.
Borrowings under the OpCo Revolver 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%.
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%.
Borrowings under the MLP Revolver 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%.
A hypothetical increase in our average interest rate on variable rate debt by 100 basis points would increase our annual interest expense by approximately $4.0 million, of which $3.8 million would relate to the MLP Revolver and $0.2 million would relate to the OpCo Revolver based on the December 31, 2022 debt balance. 43 Table of Contents
A hypothetical increase in our average interest rate on variable rate debt by 100 basis points would increase our annual interest expense by approximately $4.0 million, of which $3.8 million would relate to the MLP Revolver and $0.2 million would relate to the OpCo Revolver based on the December 31, 2023 debt balance. 44 Table of Contents
The Applicable Margin under the MLP Revolver varies between 1.75% and 2.75%, depending on the Partnership's Consolidated Leverage Ratio. The weighted average variable interest rate of our debt as of December 31, 2022 was 4.8%.
The Applicable Margin under the MLP Revolver varies between 1.75% and 2.75%, depending on the Partnership's Consolidated Leverage Ratio. The weighted average variable interest rate of our debt as of December 31, 2023 was 7.2%.