IPO Report: Westlake Chemical Partners LP (WLKP)

Westlake Chemical Partners LP (WLKP) is a Delaware limited partnership recently formed by Westlake to operate, acquire and develop ethylene production facilities and related assets. It is headquartered in Houston, TX.

Nineteen other companies are scheduled to IPO for the week of July 28, 2014.  The full IPO calendar is available at IPOpremium.

The manager and co-managers are Barclays, UBS Investment Bank, BofA Merrill Lynch, Deutsche Bank Securities, Morgan Stanley.  The joint managers are Goldman Sachs/ J.P. Morgan/ Wells Fargo Securities.

WLKP scheduled a $225 million IPO with a market capitalization of $508 milliion at a price range midpoint of $20 for Wednesday, July 30, 2014 on the NYSE.  SEC filings

WLKP IPO Overview

WLKP is a Delaware limited partnership recently formed by Westlake to operate, acquire and develop ethylene production facilities and related assets

WLKP Valuation

Glossary

Conclusion

The rating is positive

5.5% yield, carve-out

WLKP Business

WLKP is a Delaware limited partnership recently formed by Westlake to operate, acquire and develop ethylene production facilities and related assets.

Westlake is a vertically integrated, international manufacturer and marketer of basic chemicals, polymers, and fabricated building products.

WLKP’s business and operations are conducted through OpCo, a recently formed partnership between Westlake and us.

Strategic Relationship with Westlake

SLKP has a strategic relationship with Westlake, which WLKP believes will provide both WLKP and OpCo with a stable base of cash flows as well as opportunities for growth.

Westlake has an investment grade credit rating and is well-capitalized. Westlake will own 55.7% of the limited partner units (consisting of 1,436,115 common units and all of the subordinated units), the incentive distribution rights and the general partner.

OpCo’s ethylene production facilities are a critical supply source for Westlake’s production of diversified downstream products including PE and PVC and this vertical integration enables Westlake to capture the economic value of the entire ethylene value chain

Potential Growth

At the consummation of this offering, WLKP’s assets will consist of a 10% limited partner interest in OpCo as well as the general partner interest in OpCo.

The opportunity to acquire additional ownership interests in OpCo is an important potential source of WKLP's future growth, although Westlake has no obligation to sell additional interests in OpCo to WKLP.

Because WLKP owns OpCo’s general partner, WLKP has control over all of OpCo’s assets and operations.

Westlake has retained a 90% limited partner interest in OpCo and will retain a significant interest in WLKP through its ownership of WLKP’s general partner as well as 55.7% of its limited partner units (consisting of 1,436,115 common units and all of the subordinated units) and its incentive distribution rights.

OpCo assets

OpCo’s assets will be comprised of three ethylene production facilities, which convert primarily ethane into ethylene, with an aggregate annual capacity of approximately 3.4 billion pounds and a 200-mile ethylene pipeline.

OpCo will derive substantially all of its revenue from its ethylene production facilities.

Ethylene is the world’s most widely used petrochemical in terms of volume and is a key building block used to produce a number of key derivatives, such as polyethylene (“PE”) and polyvinyl chloride (“PVC”), which are used in a wide variety of end markets including packaging, construction and transportation.

 Westlake’s downstream PE and PVC production facilities will consume a substantial majority of the ethylene produced by OpCo.

OpCo will generate revenue primarily by selling ethylene to Westlake and others, as well as through the sale of co-products of ethylene production, including propylene, crude butadiene, pyrolysis gasoline and hydrogen. WLKP’s sole revenue generating asset will be its 10% limited partner interest in OpCo.

In connection with this offering, OpCo will enter into a 12-year ethylene sales agreement with Westlake, under which Westlake will agree to purchase 95% of OpCo’s planned ethylene production each year on a cost-plus basis that is expected to generate a fixed margin per pound of $0.10 (the “Ethylene Sales Agreement”).

WLKP believes this agreement will promote more stable and predictable cash flows for OpCo.

Any ethylene not sold to Westlake and all co-products that are produced by OpCo will be sold to third parties on either a spot or contract basis. OpCo will also enter into a feedstock supply agreement with Westlake that will supply OpCo with all of the ethane (and any other feedstocks) required for OpCo to produce ethylene under the Ethylene Sales Agreement.

WLKP's Dividend Policy

The board of directors of WLKP’s general partner will adopt a cash distribution policy pursuant to which WLKP intends to distribute at least the minimum quarterly distribution of $0.2750 per unit ($1.10 per unit on an annualized basis) on all of its units to the extent WLKP has sufficient cash after the establishment of cash reserves and the payment of its expenses, including payments to its general partner and its affiliates.

The annualized expected yield at $20 is 5.5%

WLKP's Competition

Due to the Ethylene Sales Agreement and integration with Westlake, OpCo does not directly compete with other ethylene producers for 95% of the planned volumes it produces.

It is only on the 5% of planned ethylene volumes not sold to Westlake where OpCo competes with other regional merchant ethylene producers, including LyondellBasell Industries, Royal Dutch Shell and Flint Hills Resources.

Westlake converts the ethylene it purchases into two key derivative products, PE and PVC, and faces competition from other chemical companies in these markets.

In PE and PVC, Westlake competes on the basis of customer service, product deliverability, quality, consistency, performance and price.

In PE, Westlake competes with some of the world’s largest chemical companies, including Chevron Phillips Chemical Company, The Dow Chemical Company, ExxonMobil Chemical Company, LyondellBasell Industries and NOVA Chemicals Corporation.

In PVC, Westlake competes with other producers including Formosa Plastics Corporation, Axiall Corporation, Oxy Chem, LP and Shintech, Inc.

Westlake additionally converts PVC into building products.

Competition in the building products market is based on on-time delivery, product quality, customer service, product consistency and price.

Westlake competes in the building products market with other producers and fabricators including Diamond Plastics Corporation and JM Eagle.

Post-IPO shares

Public Common Units, 44.3%

Interests of Westlake
Common Units, 5.7%

Subordinated Units. 50%

Incentive Distribution Rights, 100%

WLKP organization structure                             

Use of Proceeds

WLKP intends to use the $207 million in proceeds from its IPO as follows:

to purchase from OpCo a 4.4% limited partner interest in OpCo. The 4.4% interest in OpCo purchased with the proceeds from this offering, when combined with the 5.6% interest in OpCo contributed to WLKP in connection with the formation transactions, will result in its ownership of a 10% limited partner interest in OpCo following the closing of the offering.