S-1/A 1 d715499ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on July 21, 2014

Registration No. 333-195551

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Westlake Chemical Partners LP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2860   32-0436529

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

2801 Post Oak Boulevard, Suite 600

Houston, Texas 77056

(713) 960-9111

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

L. Benjamin Ederington

Vice President, General Counsel and Secretary

2801 Post Oak Boulevard, Suite 600

Houston, Texas 77056

(713) 960-9111

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

David P. Oelman

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

William N. Finnegan IV

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities To Be Registered   Amount to be
Registered(1)
  Proposed Maximum
Aggregate Offering
Per Unit(2)
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fees(3)

Common units representing limited partner interests

  12,937,500   $21.00   $271,687,500   $34,993.35

 

(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes 1,687,500 additional common units that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The Registrant previously paid $34,993 of the total registration fee in connection with the previous filing of the Registration Statement on April 29, 2014.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated July 21, 2014

PROSPECTUS

 

 

 

LOGO

Westlake Chemical Partners LP

11,250,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of common units representing limited partner interests of Westlake Chemical Partners LP. We are offering 11,250,000 common units. We were recently formed by Westlake Chemical Corporation (“Westlake”) and, prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $19.00 and $21.00 per common unit. We have applied to list our common units on the New York Stock Exchange under the symbol “WLKP.”

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 21

These risks include the following:

 

 

We are substantially dependent on Westlake for our cash flows. If Westlake does not pay us under the terms of the ethylene sales agreement (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.

 

 

On a pro forma basis we would not have had sufficient adjusted current earnings to pay the full minimum quarterly distribution on all units for the year ended December 31, 2013 and the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, with shortfalls of $1.3 million for the year ended December 31, 2013 and $3.1 million, $0.1 million and $0.6 million for the three month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, respectively.

 

 

Westlake Chemical OpCo LP (“OpCo”), a partnership between Westlake and us, is a restricted subsidiary and guarantor under Westlake’s credit facility and the indentures governing its senior notes. Restrictions in the indentures could limit OpCo’s ability to make distributions to us.

 

 

Our production facilities process volatile and hazardous materials that subject us to operating risks that could adversely affect our operating results.

 

 

Westlake owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Westlake, have conflicts of interest with us and limited duties, and they may favor their own interests to our detriment and that of our unitholders.

 

 

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 will trade.

 

 

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

 

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

 

 

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution would be substantially reduced.

 

 

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

 

     Per Common Unit      Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $         $     

Proceeds to Westlake Chemical Partners LP (before expenses)(2)

   $         $     

 

(1) Excludes a structuring fee of 0.375% of the gross proceeds of this offering payable to Barclays Capital Inc. and UBS Securities LLC. We refer you to “Underwriting” beginning on page 173 of this prospectus for additional information regarding underwriter compensation.
(2) We expect that $207.1 million, or 92.1%, of the offering proceeds will be available to us after the deduction of all fees, commissions, expenses, compensation and payment to affiliates. Please read “Use of Proceeds” on page 44.

The underwriters may purchase up to an additional 1,687,500 common units from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

 

 

Barclays   UBS Investment Bank
BofA Merrill Lynch   Deutsche Bank Securities   Morgan Stanley

 

 

 

Goldman, Sachs & Co.  

J.P. Morgan

 

Wells Fargo Securities

Prospectus dated                     , 2014


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Overview

     1   

Our Assets and Operations

     3   

Our Ethylene Sales Agreement with Westlake

     3   

Business Strategies

     4   

Competitive Strengths

     5   

Our Relationship With Westlake

     7   

Risk Factors

     7   

Our Management

     9   

Summary of Conflicts of Interest and Fiduciary Duties

     9   

Principal Executive Offices and Internet Address

     10   

Formation Transactions and Partnership Structure

     10   

Organizational Structure

     12   

The Offering

     13   

Summary Historical and Pro Forma Combined Carve-out Financial and Operating Data

     18   

Non-GAAP Financial Measure

     20   

RISK FACTORS

     21   

Risks Inherent in Our Business

     21   

Risks Inherent in an Investment in Us

     30   

Tax Risks to Common Unitholders

     39   

USE OF PROCEEDS

     44   

CAPITALIZATION

     46   

DILUTION

     47   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     49   

General

     49   

Our Minimum Quarterly Distribution

     50   

Subordinated Units

     51   

Unaudited Pro Forma Adjusted Current Earnings for the Year Ended December  31, 2013 and the Twelve Months Ended March 31, 2014

     51   

Estimated Adjusted Current Earnings for the Twelve Months Ending June 30, 2015

     57   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

     65   

General

     65   

Operating Surplus and Capital Surplus

     65   

Operating Surplus

     65   

Capital Expenditures

     67   

Subordination Period

     68   

Distributions From Operating Surplus During the Subordination Period

     70   

Distributions From Operating Surplus After the Subordination Period

     70   

General Partner Interest

     70   

Incentive Distribution Rights

     71   

Percentage Allocations of Distributions From Operating Surplus

     71   

IDR Holders’ Right to Reset Incentive Distribution Levels

     71   

Distributions From Capital Surplus

     74   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     75   

Distributions of Cash Upon Liquidation

     75   

SELECTED HISTORICAL AND PRO FORMA COMBINED CARVE-OUT FINANCIAL AND OPERATING DATA

     78   

Non-GAAP Financial Measure

     80   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     81   

Overview

     81   

How We Will Generate Revenue

     81   

How We Will Source Feedstock

     82   

How We Evaluate Our Operations

     82   

Factors Affecting the Comparability of Our Financial Results

     84   

Revenue

     84   

Expenses

     84   

Factors Affecting Our Business

     85   

Results of Operations

     85   

Capital Resources and Liquidity

     89   

Off-Balance Sheet Arrangements

     91   

Critical Accounting Policies

     91   

Recent Accounting Pronouncement

     93   

Qualitative and Quantitative Disclosures about Market Risk

     93   

INDUSTRY

     95   

Overview

     95   

Ethylene Production

     96   

Locations of Ethylene Production Assets Utilizing Advantaged Ethane Feedstock in the U.S.

     98   

Ethylene Supply and Demand

     99   

BUSINESS

     103   

Overview

     103   

Our Assets and Operations

     104   

Our Ethylene Sales Agreement with Westlake

     104   

Business Strategies

     105   

Competitive Strengths

     106   

Our Relationship With Westlake

     107   

OpCo’s Assets

     108   

Pipeline

     109   

Westlake’s Assets

     109   

Technology

     110   

Environmental and Other Regulations

     111   

Employees

     113   

Legal Proceedings

     113   

Competition

     114   

MANAGEMENT

     115   

Management of Westlake Chemical Partners LP

     115   

Executive Officers and Directors of Our General Partner

     115   

Committees of the Board of Directors

     118   

COMPENSATION DISCUSSION AND ANALYSIS

     119   

Overview

     119   

Long-Term Incentive Plan

     119   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     122   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     124   

Historical Transactions

     124   

Ownership of General Partner and Limited Partner Interests

     124   

Distributions and Payments to Our General Partner and Its Affiliates

     124   

Contractual Arrangements

     125   

Procedures for Review, Approval and Ratification of Transactions with Related Persons

     132   

 

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Table of Contents

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     133   

Summary of Applicable Duties

     133   

Conflicts of Interest

     133   

Fiduciary Duties

     138   

DESCRIPTION OF THE COMMON UNITS

     141   

The Units

     141   

Transfer Agent and Registrar

     141   

Transfer of Common Units

     141   

THE PARTNERSHIP AGREEMENT

     143   

Organization and Duration

     143   

Purpose

     143   

Capital Contributions

     143   

Voting Rights

     143   

Applicable Law; Forum, Venue and Jurisdiction

     145   

Limited Liability

     145   

Issuance of Additional Interests

     146   

Amendment of the Partnership Agreement

     147   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     149   

Dissolution

     149   

Liquidation and Distribution of Proceeds

     150   

Withdrawal or Removal of Our General Partner

     150   

Transfer of General Partner Interest

     151   

Transfer of Ownership Interests in the General Partner

     151   

Transfer of Subordinated Units and Incentive Distribution Rights

     151   

Change of Management Provisions

     152   

Limited Call Right

     152   

Non-Taxpaying Holders; Redemption

     152   

Non-Citizen Assignees; Redemption

     153   

Meetings; Voting

     153   

Voting Rights of Incentive Distribution Rights

     154   

Status as Limited Partner

     154   

Indemnification

     154   

Reimbursement of Expenses

     155   

Books and Reports

     155   

Right to Inspect Our Books and Records

     155   

Registration Rights

     156   

UNITS ELIGIBLE FOR FUTURE SALE

     157   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     159   

Taxation of the Partnership

     159   

Tax Consequences of Unit Ownership

     161   

Tax Treatment of Operations

     165   

Disposition of Units

     166   

Uniformity of Units

     168   

Tax-Exempt Organizations and Other Investors

     169   

Administrative Matters

     170   

INVESTMENT IN WESTLAKE CHEMICAL PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     173   

UNDERWRITING

     174   

Commissions and Expenses

     174   

Option to Purchase Additional Common Units

     175   

Lock-Up Agreements

     175   

 

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Offering Price Determination

     176   

Indemnification

     176   

Directed Unit Program

     176   

Stabilization, Short Positions and Penalty Bids

     176   

Electronic Distribution

     177   

New York Stock Exchange

     177   

Discretionary Sales

     177   

Stamp Taxes

     178   

Relationships

     178   

FINRA

     178   

Selling Restrictions

     178   

VALIDITY OF OUR COMMON UNITS

     182   

EXPERTS

     182   

WHERE YOU CAN FIND MORE INFORMATION

     182   

FORWARD-LOOKING STATEMENTS

     183   

INDEX TO FINANCIAL STATEMENTS

     F-i   

APPENDIX A—AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WESTLAKE CHEMICAL PARTNERS LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us or any other information to which we have referred you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. Our business, financial conditions, results of operations and prospects may have changed since that date. We will update this prospectus as required by law. This prospectus is not an offer to sell or solicitation of an offer to buy our common units in any circumstances under which the offer or solicitation is unlawful.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk Factors” and “Forward-Looking Statements.”

INDUSTRY AND MARKET DATA

The data included in this prospectus regarding the olefins industry, including trends in the market and our position and the position of our competitors within the olefins industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information (including the reports and other information other companies file with the SEC, which we did not participate in preparing and as to which we make no representation), as well as our good faith estimates, which have been derived from management’s knowledge and experience in the areas in which our business operates. Estimates of market size and relative positions in a market are difficult to develop and inherently uncertain. Accordingly, investors should not place undue weight on the industry and market data presented in this prospectus. The sources of the industry and market data used herein are the most recent data available to management and therefore management believes such data to be reliable.

We commissioned Wood Mackenzie Limited (“Wood Mackenzie”), an independent market consultant, to assist in the preparation of the “Industry” section of this prospectus, but we have not funded, nor are we otherwise affiliated with, any other third-party source cited herein. Any data sourced from Wood Mackenzie is used with the express written consent of Wood Mackenzie.

 

iv


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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus. Because it is abbreviated, this summary does not contain all of the information that you should consider before investing in our common units. While this summary highlights what we consider to be the most important information about us, you should read the entire prospectus carefully, including the historical combined carve-out and unaudited pro forma combined carve-out financial statements and the notes to those financial statements. The information presented in this prospectus assumes (i) an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” beginning on page 21 for more information about important risks that you should consider carefully before investing in our common units.

Unless the context otherwise requires, references in this prospectus to “our partnership,” “our,” “us,” “we” or like terms refer to “Westlake Chemical Partners LP” and, unless otherwise specified, Westlake Chemical OpCo LP and Westlake Chemical OpCo GP LLC. When used in a historical context, “our,” “us,” “we” or like terms refer to the ethylene business, including feedstock costs and revenue associated with the sale of ethylene and co-products, conducted by Westlake Chemical Corporation and its subsidiaries, a portion of which will be contributed to Westlake Chemical OpCo LP in connection with the closing of this offering. References in this prospectus to “our general partner” refer to Westlake Chemical Partners GP LLC. References to “OpCo” refer to Westlake Chemical OpCo LP, which is a newly created limited partnership owned by us and Westlake Chemical Corporation and its subsidiaries. References to “Westlake” refer collectively to Westlake Chemical Corporation and its subsidiaries, other than us, our general partner, OpCo and Westlake Chemical OpCo GP LLC, OpCo’s general partner. We will own a 10% limited partner interest and the general partner interest in OpCo. We will consolidate OpCo in our financial statements. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” attached as Appendix B to this prospectus.

Westlake Chemical Partners LP

Overview

We are 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. Our business and operations are conducted through OpCo, a recently formed partnership between Westlake and us. At the consummation of this offering, our assets will consist of a 10% limited partner interest in OpCo as well as the general partner interest in OpCo. Because we own OpCo’s general partner, we have 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 us through its ownership of our general partner as well as 55.7% of our limited partner units (consisting of 1,436,115 common units and all of the subordinated units) and our incentive distribution rights.

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

 

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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. Our sole revenue generating asset will be our 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”). We believe 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 (the “Feedstock Supply Agreement”).

OpCo primarily uses ethane (a component of natural gas liquids, or NGLs) to produce ethylene. Approximately 66.5% of global ethylene production is based on higher priced feedstocks (primarily naphtha, as well as butane and propane) whose prices are linked to global oil prices. As a result, global ethylene and ethylene derivative prices have generally been linked to movements in global oil prices (principally Brent crude prices) for more than 20 years. In the U.S., technological advances in horizontal drilling and fracturing techniques in shale formations have dramatically increased the production of oil and gas and resulted in the oversupply of ethane. The spread between U.S. ethane and global oil prices has provided a margin advantage for U.S. ethane-based ethylene producers, such as OpCo. Throughout 2012 and 2013, production costs for U.S. ethane-based ethylene producers were significantly lower than global ethylene production facilities utilizing naphtha and other feedstocks. This feedstock cost advantage for U.S. ethane-based ethylene producers as compared to Asia naphtha-based ethylene producers has resulted in a positive cash cost differential that has ranged from $0.23 per pound to $0.48 per pound, and averaged $0.38 per pound, since 2012. Over the last decade, cash margins of U.S. ethane-based ethylene producers were above $0.10 per pound every year other than 2009, when cash margins were below $0.10 per pound due to the global economic recession.

Given Westlake’s significant ownership interest in us following this offering, we believe Westlake is incentivized to offer us the opportunity to purchase additional assets that it owns, including additional interests in OpCo, although it is under no obligation to do so. We may also pursue organic growth opportunities at OpCo as well as acquisitions from third parties, which could be effected jointly with Westlake. OpCo currently plans to expand the capacity of one of its ethylene production facilities by approximately 250 million pounds in late 2015 or early 2016.

For the year ended December 31, 2013, OpCo had pro forma revenues of approximately $1,198.8 million, pro forma EBITDA of approximately $369.6 million and pro forma net income of approximately $295.5 million. For the same time period, we had pro forma EBITDA (net of noncontrolling interest) of approximately $37.0 million and pro forma net income (net of noncontrolling interest) of approximately $29.6 million. For the three months ended March 31, 2014, OpCo had pro forma revenues of approximately $333.4 million, pro forma EBITDA of approximately $90.9 million and pro forma net income of approximately $71.4 million. For the same time period, we had pro forma EBITDA (net of noncontrolling interest) of approximately $9.1 million and pro forma net income (net of noncontrolling interest) of approximately $7.1 million. Please read “—Summary Historical and Pro Forma Combined Carve-out Financial and Operating Data—Non-GAAP Financial Measure” for the definition of EBITDA and a reconciliation of EBITDA to net income, on a historical basis and pro forma basis, and to cash flow from operating activities, on a historical basis, which reconciliation is presented in accordance with generally accepted accounting principles (“GAAP”).

 

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Our Assets and Operations

Our sole revenue generating asset will be our 10% limited partner interest in OpCo. We will also own the general partner interest of OpCo. OpCo, in turn, will own:

 

   

two ethylene production facilities at Westlake’s Lake Charles, Louisiana complex (“Petro 1” and “Petro 2,” collectively referred to as “Lake Charles Olefins”), with a combined annual capacity of approximately 2.7 billion pounds;

 

   

one ethylene production facility at Westlake’s Calvert City, Kentucky complex (“Calvert City Olefins”), with an annual capacity of approximately 630 million pounds; and

 

   

a 200-mile common carrier ethylene pipeline that runs from Mont Belvieu, Texas to the Longview, Texas chemical complex, which includes Westlake’s Longview PE production facility (the “Longview Pipeline”).

As the owner of the general partner interest of OpCo, we will control all aspects of the management of OpCo, including its cash distribution policy. See “Business—OpCo’s Assets.”

Ethylene Production Facilities. OpCo operates three ethylene production facilities that are situated on real property leased to OpCo by Westlake pursuant to two 50-year site lease agreements. Ethylene can be produced from either NGL feedstocks, such as ethane, propane and butane, or from petroleum-derived feedstocks, such as naphtha. Lake Charles Olefins and Calvert City Olefins use ethane primarily as their feedstock. Calvert City Olefins can also use propane as a feedstock and Petro 2 can also use an ethane/propane mix, propane, butane or naphtha as a feedstock.

The following table provides information regarding OpCo’s ethylene production facilities as of June 30, 2014:

 

Plant Location (Description)

   Annual Production
Capacity
(millions of pounds)
    

Feedstock

  

Primary Uses of
Ethylene

Lake Charles, LA (Petro 1)

     1,250       ethane    PE and PVC

Lake Charles, LA (Petro 2)

     1,490       ethane, ethane/propane mix, propane, butane or naphtha    PE and PVC

Calvert City, KY (Calvert City Olefins)

     630       ethane or propane    PVC
  

 

 

       

Total

     3,370         
  

 

 

       

Longview Pipeline. OpCo owns the Longview Pipeline, which is a 200-mile common carrier ethylene pipeline, with a capacity of 3.5 million pounds per day that runs from Mont Belvieu, Texas to the Longview, Texas chemical complex, which includes Westlake’s Longview PE production facility.

Our Ethylene Sales Agreement with Westlake

In connection with this offering, OpCo will enter into the Ethylene Sales Agreement with Westlake. The Ethylene Sales Agreement will have an initial term through December 31, 2026 and will automatically renew thereafter for successive 12-month terms unless terminated by either party. The Ethylene Sales Agreement requires Westlake to purchase 95% of OpCo’s planned ethylene production each year, subject to certain exceptions and a maximum commitment of 3.8 billion pounds per year. If OpCo’s actual production is in excess of planned ethylene production, Westlake will have the option to purchase up to 95% of production in excess of planned production.

 

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Westlake’s purchase price for the minimum commitment of ethylene under the Ethylene Sales Agreement will be calculated on a per pound basis and includes:

 

   

the actual price paid by OpCo for the feedstock and natural gas to produce each pound of ethylene (subject to a cap and a floor on the amount of feedstock and natural gas used); plus

 

   

the estimated per pound operating costs (including selling, general and administrative expenses) for the year and a five-year average of future expected maintenance capital expenditures and other turnaround expenditures; less

 

   

the proceeds received by OpCo from the sale of co-products associated with the ethylene purchased by Westlake; plus

 

   

a $0.10 per pound margin.

Westlake’s purchase price for any ethylene produced in excess of the planned production amount will generally equal OpCo’s estimated variable costs of producing the incremental ethylene, plus a $0.10 per pound margin. The estimated operating costs and maintenance capital expenditures and other turnaround expenditures will be adjusted at the end of each year to reflect certain changes in forecasted costs. If OpCo’s actual operating costs and maintenance capital expenditures and other turnaround expenditures are higher than the estimate for any year, or OpCo’s actual production is below the planned production amount upon which the per pound operating costs and maintenance capital expenditures and other turnaround expenditures are based, OpCo will be entitled to include in the fee for the succeeding year a surcharge to recover the resulting shortfall. If these costs are lower than estimated, OpCo will retain the difference, but such difference may be reflected in periodic downward adjustments to the total estimated costs. The result of the fee structure is that OpCo should recover the portion of its total operating costs and maintenance capital expenditures and other turnaround expenditures attributable to Westlake’s ethylene purchases. Approximately 5% of OpCo’s ethylene production will be sold at market rates on either a spot or contract basis to third parties. Average U.S. industry margins for producing ethane-based ethylene are currently substantially in excess of $0.10 per pound, and averaged approximately $0.46 per pound since 2013.

Business Strategies

Our primary business objective is to operate efficiently and safely and to grow our business responsibly, enabling us to increase the amount of cash distributions we make to our unitholders over time while maintaining our financial stability. We intend to accomplish these objectives by executing the following strategies:

 

   

Generate Stable, Fee-Based Cash Flows. We are focused on generating stable cash flows by selling 95% of our ethylene production to Westlake under a long-term, fee-based contract. Our contract with Westlake includes minimum volume commitments and a pricing provision designed to permit OpCo to generally recover its costs (including selling, general and administrative expenses), plus a fixed $0.10 margin per pound of ethylene sold. In addition, we plan to supplement these relatively stable cash flows with additional cash flows by maximizing the price of the 5% of our ethylene production and associated co-products sold to third parties. We intend to maintain our focus on fee-based cash flows as we grow.

 

   

Focus on Operational Excellence. We intend to maximize the throughput of our production facilities while providing safe, reliable and efficient operations. We believe that a key component in generating stable cash flows is to continuously maintain, monitor and improve the safety and reliability of our operations.

 

   

Pursue Organic Growth Opportunities. We intend to enhance the profitability of OpCo’s existing assets by pursuing opportunities such as capacity expansion projects. OpCo plans to expand Petro 1 to increase capacity by approximately 250 million pounds in late 2015 or early 2016 and expects to finance this expansion through borrowings from Westlake. We may also pursue additional organic development projects complementary to our existing businesses, either through OpCo or independently.

 

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Increase our Ownership of OpCo. We intend to increase our ownership interest in OpCo over time either by purchasing newly issued interests from OpCo or by purchasing outstanding interests in OpCo from Westlake.

 

   

Pursue Growth Opportunities Through Acquisitions. We intend to pursue acquisitions of complementary assets from third parties. Such acquisitions could be pursued independently by OpCo, independently by us or jointly with Westlake.

Competitive Strengths

We believe we are well positioned to execute our business strategies based on the following competitive strengths:

 

   

Stable and Predictable Cash Flows from OpCo. The Ethylene Sales Agreement is designed to cover our costs and provide a $0.10 margin per pound on a substantial majority of the ethylene we produce, reducing our exposure to commodity price volatility and promoting more stable cash flow. Westlake is obligated to purchase 95% of our planned ethylene production. In addition, Westlake is expected to exercise its option to purchase 95% of our excess production. We believe each of those factors should result in more stable cash flows.

Each of OpCo’s ethylene production facilities requires turnaround maintenance on average every five years. OpCo intends to reserve approximately $29.3 million per year to fund these turnaround expenditures. Reserving these amounts should enable OpCo to maintain steady cash flows for distributions while funding these significant non-annual expenditures. We intend to use $55.4 million from the proceeds of this offering to fund OpCo’s initial balance for this turnaround reserve. Westlake’s purchase price for ethylene purchased under the Ethylene Sales Agreement will include a component (adjusted annually) designed to cover, over the long term, substantially all of OpCo’s turnaround expenditures.

 

   

Strategic Relationship with Westlake. We have a strategic relationship with Westlake, which we believe will provide both us 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 our limited partner units (consisting of 1,436,115 common units and all of the subordinated units), our incentive distribution rights and our 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. In particular, we expect to benefit from the following aspects of our relationship with Westlake:

 

   

Attractive Downstream Polyethylene Product Mix. Westlake focuses on a low-density PE (“LDPE”) and linear low-density PE (“LLDPE”) product mix. LDPE has enjoyed higher margins than LLDPE and high-density PE (“HDPE”), the more commoditized PE grades. A majority of Westlake’s production is LDPE. Westlake is a leading producer of LDPE by capacity in North America and predominantly uses the autoclave technology (as opposed to tubular technology), which is capable of producing higher margin specialty PE products. Autoclave LDPE is a more specialized form of LDPE that feeds into a broad array of end products. In contrast, tubular LDPE is a more commoditized form of LDPE with a narrower range of applications. Approximately 80% of Westlake’s LDPE production is autoclave. Furthermore, most announced LDPE industry capacity additions in North American are projected to be tubular LDPE.

 

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Highly Integrated Polymers and Vinyls Chain. Westlake is highly integrated along its PVC production chain. Most U.S.-based PVC producers including Westlake internally produce their chlorine requirements, but most rely on the merchant market for their ethylene requirements. Westlake, however, is substantially integrated into ethylene as well. As a result, Westlake enjoys operational and cost advantages relative to non-ethylene integrated PVC producers. Westlake’s vinyls, PVC and downstream PVC building products businesses are well positioned to capitalize on improvements in the construction market, which could drive additional usage of ethylene.

 

   

Acquisition and Growth Opportunities. Immediately after this offering we will own a 10% limited partner interest in OpCo. The opportunity to acquire additional ownership interests in OpCo is an important potential source of our future growth, although Westlake has no obligation to sell additional interests in OpCo to us.

 

   

Access to Operational and Industry Expertise. We expect to benefit from Westlake’s extensive operational, commercial and technical expertise, as well as its industry relationships, as we seek to optimize and expand OpCo’s existing asset base.

 

   

Well Maintained Assets with Long History of Reliable Operations. OpCo continually invests in the maintenance and integrity of its assets. OpCo’s ethylene production facilities have operated on average above the industry average operating rate of 86.4% since 2005. OpCo conducts regularly scheduled turnarounds at each of its ethylene production facilities to perform planned major maintenance activities. OpCo is also continually focused on improving its asset portfolio and cost position. At Calvert City Olefins, OpCo recently completed an expansion and feedstock conversion project that resulted in a 180 million pound capacity expansion and also provided OpCo with 100% ethane feedstock capability. In addition, OpCo plans to expand Petro 1 by approximately 250 million pounds in late 2015 or early 2016.

 

   

Strategically Located Assets. OpCo benefits from the strategic location of its ethylene production facilities, which allows it to access low-cost ethane from the Gulf Coast and the Marcellus and Utica shale formations. Petro 1 and Petro 2 are both large-scale facilities with abundant feedstock sourcing capabilities given their proximity to Mont Belvieu, the largest NGLs hub on the Gulf Coast. Westlake currently supplies feedstock to Lake Charles Olefins through several pipelines from a variety of suppliers in Texas and Louisiana. Additionally, Calvert City Olefins is connected to the ATEX pipeline, allowing OpCo to use ethane feedstocks from the Marcellus and Utica shale formations. Westlake’s Calvert City complex is one of the few PVC plants outside the Gulf Coast, and it is also the only fully integrated vinyls complex located outside of the Gulf Coast, giving it a shipping advantage for certain key markets, such as the Midwest, the Northeast and Canada. OpCo recently completed an expansion and feedstock conversion project at this facility, which increased its ethylene production and enabled it to take advantage of low-cost ethane production from the Marcellus and Utica shale formations.

 

   

Conservative Financial Profile. OpCo has a $600.0 million intercompany credit agreement with Westlake that may be used to fund growth projects and working capital needs. We expect to have $246.5 million of indebtedness at the closing of this offering and believe that our access to the debt and equity capital markets should provide us with the financial flexibility necessary to pursue organic expansion and acquisition opportunities. Westlake is a well-capitalized, credit worthy sponsor with an investment grade credit rating and a significant amount of liquidity. Westlake had cash, cash equivalents and current marketable securities of $776.3 million as of March 31, 2014. Westlake may also provide direct and indirect financing to us from time to time.

 

   

Experienced Management Team. Our management team consists of senior officers of Westlake, who average over 28 years of experience in the petrochemical industry. We believe the level of operational and financial expertise of our management team will prove critical in successfully executing our business strategies.

 

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Our Relationship With Westlake

Our principal strength is our relationship with Westlake. Westlake is a vertically integrated, international manufacturer and marketer of basic chemicals, polymers and fabricated building products. Westlake benefits from highly integrated production facilities that allow it to process raw materials into higher value-added chemicals and building products. As of March 31, 2014, Westlake had 13.6 billion pounds per year of aggregate production capacity at 15 manufacturing sites in North America as well as a 59% interest in a joint venture that operates a vinyls facility in China. For the three months ended March 31, 2014 and the year ended December 31, 2013, Westlake had consolidated revenues of approximately $1.0 billion and $3.8 billion, respectively, and net income of $158.0 million and $610.4 million, respectively. Westlake’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “WLK.”

Westlake will retain a significant interest in us through its ownership of 55.7% of our limited partner units (consisting of 1,436,115 common units and all of the subordinated units), our incentive distribution rights and our general partner. We believe Westlake will promote and support the successful execution of our business strategies because of its significant ownership in us and our general partner and its intention to use us to grow its ethylene business. We believe Westlake will offer us the opportunity to purchase additional assets from it, including additional interests in OpCo, although it is under no obligation to do so. We also may have the opportunity to pursue acquisitions which could be effected jointly with Westlake.

We will enter into an omnibus agreement with Westlake in connection with this offering. Under the omnibus agreement, Westlake will agree to indemnify OpCo for certain environmental and other liabilities relating to OpCo’s ethylene production facilities and related assets and OpCo will indemnify Westlake for certain environmental liabilities for which Westlake is not otherwise obligated to indemnify OpCo and certain other losses and liabilities resulting from Westlake providing services to OpCo. We or OpCo will enter into a number of agreements with Westlake in connection with this offering, including the Ethylene Sales Agreement described under “—Our Ethylene Sales Agreement with Westlake” and the Feedstock Supply Agreement. Please read “Certain Relationships and Related Transactions.”

While our relationship with Westlake and its subsidiaries is a significant strength, it is also a source of potential conflicts. Please read “Conflicts of Interest and Fiduciary Duties.”

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax consequences of our common units. You should carefully consider the following risks, the risks described in “Risk Factors” and the other information in this prospectus before deciding whether to invest in our common units.

Risks Inherent in Our Business

 

   

We are substantially dependent on Westlake for our cash flows. 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.

 

   

On a pro forma basis we would not have had sufficient adjusted current earnings to pay the full minimum quarterly distribution on all units for the year ended December 31, 2013 and for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, with shortfalls of $1.3 million for the year ended December 31, 2013 and $3.1 million, $0.1 million and $0.6 million for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, respectively.

 

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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 and guarantor under Westlake’s credit facility and the indentures governing its senior notes. Restrictions in the indentures could limit OpCo’s ability to make distributions to us.

 

   

Substantially all of OpCo’s sales are generated at three facilities located at two sites. 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.

 

   

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. If OpCo is not able to renew the site lease agreements or if the site lease agreements are terminated by Westlake, OpCo may have to relocate Lake Charles Olefins and Calvert City Olefins, abandon the assets or sell the assets to Westlake.

 

   

OpCo’s ability to receive greater cash flows from increased production may be limited by the Ethylene Sales Agreement.

 

   

Many of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future. In addition, while we intend to establish cash reserves in order to cover turnaround expenditures, the amounts we reserve may not be sufficient to fully cover such expenditures.

 

   

Our production facilities process volatile and hazardous materials that subject us to operating risks that could adversely affect our operating results.

 

   

Our operations and assets are subject to extensive environmental, health and safety laws and regulations.

Risks Inherent in an Investment in Us

 

   

Westlake owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Westlake, have conflicts of interest with us and limited duties, and they may favor their own interests to our detriment and that of our unitholders.

 

   

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

 

   

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 will trade.

 

   

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

 

   

Unitholders will experience immediate and substantial dilution of $17.52 per common unit.

 

   

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

 

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Unitholders may have liability to repay distributions.

 

   

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Tax Risk Factors to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution to you would be substantially reduced.

 

   

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

 

   

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

Our Management

We are managed and operated by the board of directors and executive officers of our general partner, Westlake Chemical Partners GP LLC, a wholly owned subsidiary of Westlake. As a result of owning our general partner, Westlake will have the right to appoint all members of the board of directors of our general partner, including at least three directors meeting the independence standards established by the NYSE, and the board of directors of our general partner will appoint its executive officers. Each of our general partner’s executive officers is also an executive officer of Westlake, and we expect that our general partner’s executive officers will devote less than a majority of their total business time to the management of our business. At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read “Management.”

Summary of Conflicts of Interest and Fiduciary Duties

Our general partner has a contractual duty to manage us in a manner that it believes is not adverse to our interests. However, the officers and directors of our general partner have fiduciary duties to manage our general partner in a manner beneficial to Westlake, the owner of our general partner. As a result, conflicts of interest may arise in the future between us or our unitholders, on the one hand, and Westlake and our general partner, on the other hand.

Our partnership agreement limits the liability of and replaces the fiduciary duties owed by our general partner to our unitholders. Our partnership agreement also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of duties by our general partner or its directors or officers. Our partnership agreement permits the board of directors of our general partner to form a conflicts committee of independent directors and to submit to that committee matters that the board believes may involve conflicts of interest. Any matters approved by the conflicts committee will be conclusively deemed to be approved by us and all of our partners and not a breach by our general partner of any duties it may owe us or our unitholders. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each unitholder is

 

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treated as having consented to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law.

For a more detailed description of the conflicts of interest and duties of our general partner and its directors and officers, please read “Conflicts of Interest and Fiduciary Duties.” For a description of other relationships with our affiliates, please read “Certain Relationships and Related Transactions.”

Principal Executive Offices and Internet Address

Our principal executive offices are located at 2801 Post Oak Boulevard, Suite 600, Houston, Texas 77056, and our telephone number is (713) 960-9111 or toll free at (888) 777-6414. Our website address will be http://www.wlkpartners.com. We intend to make our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Formation Transactions and Partnership Structure

We are a Delaware limited partnership formed in March 2014 by Westlake to own and operate certain of the businesses that have historically been conducted by Westlake.

At or prior to the closing of this offering:

 

   

Westlake will cause to be transferred to OpCo Lake Charles Olefins, Calvert City Olefins and the Longview Pipeline;

 

   

OpCo will enter into the Ethylene Sales Agreement with Westlake pursuant to which Westlake will commit to purchase ethylene from OpCo; and

 

   

OpCo will enter into the Feedstock Supply Agreement, omnibus agreement, site lease agreements and other agreements with Westlake relating to the purchase and supply of ethane and other feedstocks, the operation of OpCo’s ethylene production facilities, the sharing of various site services and other matters.

For further details on our agreements with Westlake and its affiliates, please read “Business—Agreements with Affiliates” and “Certain Relationships and Related Transactions.”

In connection with the closing of this offering, the following will occur:

 

   

Westlake (which currently owns all of OpCo’s limited partner interests) will contribute a 5.6% limited partner interest in OpCo to us;

 

   

Westlake will contribute OpCo’s general partner to us;

 

   

in exchange for Westlake’s contribution, we will issue to Westlake 1,436,115 common units, all subordinated units and all of our incentive distribution rights;

 

   

we will issue 11,250,000 common units to the public;

 

   

we will receive gross proceeds of $225.0 million from the issuance and sale of 11,250,000 common units at an assumed initial offering price of $20.00 per unit (the mid-point of the price range set forth on the cover page of this prospectus);

 

   

we will use $17.9 million of the proceeds from this offering to pay underwriting discounts, a structuring fee and estimated offering expenses;

 

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we will use $207.1 million of the proceeds from this offering to purchase from OpCo an additional 4.4% limited partner interest in OpCo (resulting in us owning a 10% limited partner interest), of which OpCo will use (after deducting approximately $55.4 million to establish a turnaround reserve) to reimburse Westlake for certain pre-formation capital expenditures with respect to the assets contributed to OpCo and any remaining net proceeds will be used to repay intercompany debt to Westlake;

 

   

we and OpCo will enter into an omnibus agreement with Westlake, our general partner and other affiliates governing, among other things, indemnification obligations; and

 

   

OpCo will enter into a credit facility with Westlake.

We have granted the underwriters a 30-day option to purchase up to an aggregate of 1,687,500 additional common units. Any net proceeds received from the exercise of this option will be used to purchase an additional limited partner interest in OpCo. The amount of the additional interest purchased will depend on the amount of the option exercised, and will be calculated at approximately 0.4% purchased for each one million of additional common units purchased by the underwriters. If the underwriters exercise their option to purchase additional common units in full, we would purchase an additional 0.6% limited partner interest in OpCo.

 

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Organizational Structure

The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.

 

LOGO

 

Public Common Units

     44.3 %(1) 

Interests of Westlake:

  

Common Units

     5.7 %(1) 

Subordinated Units

     50.0 %(1) 

Non-Economic General Partner Interest

     0.0 %(2) 

Incentive Distribution Rights

        (3) 
  

 

 

 
     100.0
  

 

 

 

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common units. If the underwriters exercise their option to purchase additional common units in full, the public common units will represent a 47.8% limited partner interest in us and the common units and subordinated units held by Westlake will represent 5.3% and 46.9% limited partner interests, respectively, in us.
(2) Our general partner owns a non-economic general partner interest in us. Please read “How We Make Distributions To Our Partners—General Partner Interest.”
(3) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.” Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests. All of our incentive distribution rights will be issued to Westlake.

 

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The Offering

 

Common units offered to the public

11,250,000 common units.

 

  12,937,500 common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

12,686,115 common units (or 14,373,615 common units if the underwriters’ option to purchase additional common units is exercised in full) and 12,686,115 subordinated units for a total of 25,372,230 limited partner units (or 27,059,730 limited partner units if the underwriters’ option to purchase additional common units is exercised in full).

 

Use of proceeds

We intend to use the estimated net proceeds of approximately $207.1 million from this offering (based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, structuring fee and offering expenses, to purchase from OpCo a 4.4% limited partner interest in OpCo, and OpCo will use such net proceeds (after deducting approximately $55.4 million to establish a turnaround reserve) to reimburse Westlake for certain pre-formation capital expenditures with respect to the assets contributed to OpCo and any remaining net proceeds will be used to repay intercompany debt to Westlake. The 4.4% interest in OpCo purchased with the proceeds from this offering, when combined with the 5.6% interest in OpCo contributed to us in connection with the formation transactions, will result in our ownership of a 10% limited partner interest in OpCo following the closing of this offering.

 

  If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds will be approximately $31.6 million (based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to purchase an additional limited partner interest in OpCo, and OpCo will use such net proceeds to first reimburse any remaining unreimbursed capital expenditures and then to repay intercompany debt to Westlake. Please read “Use of Proceeds.”

 

Cash distributions

Within 60 days after the end of each quarter, beginning with the quarter ending September 30, 2014 we expect to make a minimum quarterly distribution of $0.2750 per common unit and subordinated unit ($1.10 per common unit and subordinated unit on an annualized basis) to unitholders of record on the applicable record date. For the first quarter that we are publicly traded, we will pay a prorated distribution covering the period from the completion of this offering through September 30, 2014, based on the actual length of that period.

 

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  The board of directors of our general partner will adopt a policy pursuant to which distributions for each quarter will be paid to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail in “Cash Distribution Policy and Restrictions on Distributions.”

 

  Our partnership agreement generally provides that we will distribute cash each quarter during the subordination period in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.2750, plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.2750; and

 

   

third, to the holders of common and subordinated units, pro rata, until each unit has received a distribution of $0.3163.

 

  If cash distributions to our unitholders exceed $0.3163 per common unit and subordinated unit in any quarter, our unitholders and Westlake, as the holder of our incentive distribution rights (or IDRs), will receive distributions according to the following percentage allocations:

 

     Marginal Percentage Interest in
Distributions
 

Total Quarterly Distribution Target Amount

   Unitholders     IDR Holders  

above $0.3163 up to $0.3438

     85.0     15.0

above $0.3438 up to $0.4125

     75.0     25.0

above $0.4125

     50.0     50.0

 

  We refer to the additional increasing distributions to Westlake as “incentive distributions.” Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

  The amount of adjusted current earnings we generated on a pro forma basis during the year ended December 31, 2013 and the twelve months ended March 31, 2014 would have been approximately $26.6 million and $29.1 million, respectively. These amounts would have been sufficient to pay 100% of the aggregate minimum quarterly distribution on all common units for those periods. However, our pro forma adjusted current earnings for the year ended December 31, 2013 would only allow us to pay aggregate cash distributions of $0.9968, or approximately 90.6% of the minimum quarterly distribution, on all of our subordinated units. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions,” that we will have sufficient cash to pay the minimum quarterly distribution of $0.2750 on all of our common units and subordinated units for the twelve months ending June 30, 2015. However, we do not have a legal or contractual obligation to pay quarterly distributions at the minimum quarterly distribution rate or at any other rate and there is no guarantee that we will pay distributions to our unitholders in any quarter. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated Units

Westlake will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that for any quarter during the subordination period, holders of the subordinated units will not be entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid an aggregate amount of at least the minimum quarterly distribution multiplied by the total number of outstanding common and subordinated units for each of three consecutive, non-overlapping four-quarter periods ending on or after June 30, 2017 and there are no outstanding arrearages on our common units.

 

  Notwithstanding the foregoing, the subordination period will end on the first business day after we have paid an aggregate amount of at least 150.0% of the minimum quarterly distribution on an annualized basis multiplied by the total number of outstanding common and subordinated units and we have earned that amount plus the related distribution on the incentive distribution rights, for any four-quarter period ending on or after June 30, 2015 and there are no outstanding arrearages on our common units.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units will thereafter no longer be entitled to arrearages.

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding

 

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units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Westlake will own an aggregate of 55.7% of our outstanding units (or 52.2% of our outstanding units, if the underwriters exercise their option to purchase additional common units in full). This will give Westlake the ability to prevent the removal of our general partner. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will provide Westlake the ability to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (i) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (ii) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “The Partnership Agreement—Limited Call Right.”

 

Directed Unit Program

At our request, the underwriters have reserved up to 5% of the common units being offered by this prospectus for sale at the initial public offering price to the officers, directors and employees of our general partner and its affiliates and certain other persons associated with us, as designated by us. For further information regarding our directed unit program, please read “Underwriting.”

 

  Members of the Chao family or entities affiliated with such members, who in the aggregate beneficially own approximately 69% of Westlake’s common stock, have indicated an interest in purchasing a portion of the common units being offered in this offering through our directed unit program.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2016, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than 20% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.10 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.220 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

 

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Material federal income tax consequences

Subject to the discussion under “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status” and the limitations set forth therein, it is the opinion of Vinson & Elkins L.L.P. that we will be treated as a partnership for U.S. federal income tax purposes. As a result, we generally will not be liable for U.S. federal income taxes. Instead, each of our unitholders will take into account its share of our income, gains, losses and deductions in computing its U.S. federal income tax liability as if it had earned such income directly, even if we do not make cash distributions to that unitholder. Consequently, a unitholder may be liable for U.S. federal income taxes as a result of ownership of our units even if that unitholder has not received a cash distribution from us. Cash distributions by us to a unitholder generally will not give rise to income or gain.

 

  For a discussion of the material U.S. federal income tax consequences to prospective unitholders, you should read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We have applied to list our common units on the New York Stock Exchange (the “NYSE”) under the symbol “WLKP.”

 

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Summary Historical and Pro Forma Combined Carve-out Financial and Operating Data

We were formed on March 14, 2014 and have had no operations since formation. Therefore, our historical financial data is not included in the following table. The following table shows summary historical combined carve-out financial data of the predecessor of Westlake Chemical Partners LP (the “Predecessor”). The following table also shows our summary unaudited pro forma combined carve-out financial data for the periods and as of the dates indicated. The summary historical combined carve-out balance sheet data presented as of December 31, 2013 and 2012 and the statement of operations data for the years ended December 31, 2013, 2012, and 2011 are derived from the audited historical combined carve-out financial statements of our Predecessor, which are included elsewhere in this prospectus. The summary historical combined carve-out balance sheet data presented as of March 31, 2013 and December 31, 2011 is derived from the unaudited historical combined carve-out financial statements of our Predecessor, which are not included in this prospectus. The summary historical combined carve-out balance sheet presented as of March 31, 2014 and the statement of operations data for the three months ended March 31, 2014 and 2013 are derived from the unaudited historical combined carve-out financial statements of our Predecessor, which are included elsewhere in this prospectus.

The summary historical combined carve-out financial statements of our Predecessor reflect Westlake’s entire ethylene business, including, but not limited to, procuring feedstock, managing inventory and commodity risk and transporting ethylene from manufacturing facilities. Our assets on the closing date of the offering will consist only of our 10% limited partner interest in OpCo as well as the general partner interest in OpCo. OpCo’s assets will consist of Lake Charles Olefins, Calvert City Olefins and the Longview Pipeline. OpCo’s financial results will be consolidated into ours for financial reporting purposes. The following table should be read together with, and is qualified in its entirety by reference to, the historical unaudited and audited combined carve-out financial statements of the Predecessor and the accompanying notes included elsewhere in this prospectus. The following table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary unaudited pro forma combined carve-out financial data presented in the following table as of March 31, 2014, and for the three months ended March 31, 2014 and the year ended December 31, 2013, are derived from the unaudited pro forma combined carve-out financial statements included elsewhere in this prospectus. The unaudited pro forma combined carve-out balance sheet assumes the offering and the related transactions occurred as of March 31, 2014, and the unaudited pro forma combined carve-out statements of operations for three months ended March 31, 2014 and the year ended December 31, 2013, assumes the offering and the related transactions occurred as of January 1, 2013. These transactions include, and the unaudited pro forma combined carve-out financial statements give effect to, the following:

 

   

Westlake’s contribution to OpCo of Lake Charles Olefins, Calvert City Olefins and the Longview Pipeline;

 

   

the transfer by Westlake to us of a limited partner interest in OpCo, and a 100% interest in Westlake Chemical OpCo GP LLC, which holds the general partner interest in OpCo, in exchange for the issuance by us to Westlake of 1,436,115 common units, 12,686,115 subordinated units and all of the incentive distribution rights;

 

   

the consummation of this offering and our issuance of 11,250,000 common units to the public at an assumed initial offering price of $20.00 per unit and the use of proceeds therefrom as described under “Use of Proceeds”; and

 

   

OpCo’s execution of the Ethylene Sales Agreement, omnibus agreement and services and secondment agreement with Westlake.

The unaudited pro forma combined carve-out financial statements do not give effect to an estimated $3.0 million in incremental general and administrative expenses that we expect to incur annually as a result of being a

 

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separate, publicly traded partnership, including costs associated with preparing and filing annual and quarterly reports to unit holders, financial statement audits, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees and independent director compensation.

The following table presents the non-GAAP financial measure of EBITDA, which we use in our business. For a definition of EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure.”

 

    Westlake Chemical Partners  LP
Predecessor Historical
    Westlake Chemical
Partners LP
Pro Forma
 
    Three Months Ended
March 31,
    Year Ended December 31,     Three Months
Ended
March 31,
    Year Ended
December 31,
 
        2014             2013             2013             2012             2011         2014         2013      
    (unaudited)     (unaudited)           (unaudited)     (unaudited)  
    (dollars in thousands, except per unit data)  

Combined Carve-out Statement of Operations Data:

             

Total net sales

  $ 560,014      $ 500,917      $ 2,127,747      $ 2,249,098      $ 2,251,043     $ 333,346      $ 1,198,805   

Gross profit

    232,314        190,010        872,607        635,652        409,098       79,592        318,464   

Selling, general and administrative expenses

    7,778        6,171        25,451        24,103        24,312       6,252        18,942   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    224,536        183,839        847,156        611,549        384,786       73,340        299,522   

Interest expense—Westlake

    (3,591     (950     (8,032     (8,937     (8,947     (1,583     (2,531

Other income (expense), net

    1,252        4,045        7,701        4,186        2,804       (12     (168
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    222,197        186,934        846,825        606,798        378,643       71,745        296,823   

Provision for income taxes

    78,323        66,209        300,279        210,878        131,670       331        1,316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 143,874      $ 120,725      $ 546,546      $ 395,920      $ 246,973     $ 71,414      $ 295,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Westlake Chemical Partners LP

            $ 7,141      $ 29,551   

Limited partners’ interest in net income attributable to Westlake Chemical Partners LP

             

Common units

            $ 3,571      $ 14,776   

Subordinated units

            $ 3,570      $ 14,775   

Net income per limited partner unit (basic and diluted):

             

Common units

            $ 0.28      $ 1.16   

Subordinated units

            $ 0.28      $ 1.16   

Combined Carve-out Balance Sheet Data (end of period):

             

Working capital

  $ 21,376      $ (34,610   $ 43,642      $ 40,336      $ 90,420     $ 61,434     

Total assets

    1,020,402        916,271        1,041,474        834,843        800,376       862,897     

Total debt

    302,357        83,398        252,973        253,000        253,000       160,164     

Net investment/Partners’ capital

    407,093        467,692        455,432        273,812        216,705       701,088     

Combined Carve-out Cash Flow Data:

             

Cash flow from:

             

Operating activities

  $ 197,886      $ 162,991      $ 602,509      $ 496,821      $ 268,716      

Investing activities

    (51,714     (65,730     (230,050     (158,008     (71,637    

Financing activities

    (146,172     (97,261     (372,459     (338,813     (197,079    

Other Data:

             

Depreciation and amortization

  $ 19,014      $ 16,035      $ 73,463      $ 64,257      $ 57,193      

Capital expenditures

    51,305        65,051        223,130        158,440        73,681      

EBITDA(1)

    244,802        203,919        928,320        679,992        444,783     $ 90,902      $ 369,609   

EBITDA attributable to Westlake Chemical Partners LP

            $ 9,090      $ 36,961   

 

(1) For a definition of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure.”

 

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Non-GAAP Financial Measure

We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. EBITDA is not a measure made in accordance with GAAP. EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, lenders and rating agencies, to assess:

 

   

our operating performance as compared to that of other publicly traded partnerships, without regard to historical cost basis or capital structure;

 

   

our ability to incur and service debt and fund capital expenditures; and

 

   

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of EBITDA in this prospectus provides useful information to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to EBITDA are net income and cash flow from operating activities. EBITDA should not be considered as an alternative to GAAP net income or cash flow from operating activities. EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect net income and cash flow from operating activities. You should not consider EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because EBITDA may be defined differently by other companies in our industry, our definition of EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of EBITDA to net income, on a historical basis and pro forma basis, and cash flow from operating activities, on a historical basis.

 

    Westlake Chemical Partners  LP
Predecessor Historical
    Westlake Chemical
Partners LP
Pro Forma
 
    Three Months Ended
March 31,
    Year Ended December 31,     Three Months
Ended
March 31,
    Year Ended
December 31,
 
        2014             2013             2013             2012             2011         2014         2013      
    (unaudited)     (unaudited)          

(unaudited)

    (unaudited)  
    (dollars in thousands)  

Reconciliation of EBITDA and Pro Forma EBITDA to net income and cash flow from operating activities

             

EBITDA attributable to Westlake Chemical Partners LP

            $ 9,090      $ 36,961   

Add: EBITDA attributable to noncontrolling interest in OpCo

              81,812        332,648   

EBITDA

  $ 244,802      $ 203,919      $ 928,320      $ 679,992      $ 444,783        90,902        369,609   

Less:

             

Provision for income taxes

    (78,323     (66,209     (300,279     (210,878     (131,670     (331     (1,316

Interest expense

    (3,591     (950     (8,032     (8,937     (8,947     (1,583     (2,531

Depreciation and amortization

    (19,014     (16,035     (73,463     (64,257     (57,193     (17,574     (70,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 143,874      $ 120,725      $ 546,546      $ 395,920      $ 246,973      $ 71,414      $ 295,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, and other

    50,380        33,369        16,562        105,804        22,907       

Equity in loss (income) of joint venture, net of dividends

    72        (389     402        277        (364    

Deferred income taxes

    3,267        8,104        37,054        (8,096     (1,859    

Loss from disposition of fixed assets

    353        1,438        1,905        2,834        30       

(Recovery of) provision for doubtful accounts

    (60     (256     40        82        1,029       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Cash flow from operating activities

  $ 197,886      $ 162,991      $ 602,509      $ 496,821      $ 268,716       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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RISK FACTORS

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition, results of operations and adjusted current earnings could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

Risks Inherent in Our Business

We are substantially dependent on Westlake for our cash flows. 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.

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $0.2750 per unit, or $1.10 per unit per year, which will require total distributions of approximately $7.0 million per quarter, or $27.9 million per year, based on the number of common and subordinated units that will be outstanding after the completion of this offering.

Initially, all of our cash flow will be generated from cash distributions from OpCo, a partnership between us and Westlake, and a substantial majority of OpCo’s cash flow will be generated from payments by Westlake under the Ethylene Sales Agreement. 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. Such events include, for example, acts of God or calamities which affect the operation of OpCo’s facilities; certain labor difficulties (whether or not the demands of the employees are within the power of OpCo to concede); and governmental orders or laws. In addition, Westlake is not obligated to purchase ethylene with respect to any period during which OpCo’s facilities are not operating due to scheduled or unscheduled maintenance or turnarounds (which occur approximately every five years) other than under certain circumstances relating to the occurrence of force majeure. We expect that each of OpCo’s facilities will have a turnaround once every five years and will not operate for typically between 25 and 45 days during each turnaround. However, the duration of a turnaround may be longer. For example, the expansion of Petro 1, as described in “Business—OpCo’s Assets—Lake Charles Olefins,” is being completed in conjunction with a planned turnaround, which is expected to result in a downtime of between 75 and 80 days due to the expansion which will add 250 million pounds of capacity. A suspension of Westlake’s obligations under the Ethylene Sales Agreement, including during periods where OpCo’s facilities are not operating due to scheduled or unscheduled maintenance or turnarounds, would reduce OpCo’s revenues and cash flows, and could materially adversely affect our ability to make distributions to our unitholders.

Westlake may be unable to generate enough cash flow from operations to meet its minimum obligations under the Ethylene Sales Agreement if its business is adversely impacted by competition, operational problems, general adverse economic conditions or inability to obtain feedstock. 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. 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. If Westlake is unable to generate sufficient cash flow from its operations to meet its obligations under the Ethylene Sales Agreement,

 

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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 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;

 

   

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 or exports of NGLs 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, including the method of accounting for leases;

 

   

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.

 

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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 could be less than the margin we earn from ethylene sales to Westlake;

 

   

the level of capital expenditures we or OpCo makes;

 

   

the cost of acquisitions;

 

   

construction costs;

 

   

fluctuations in our or OpCo’s working capital needs;

 

   

our or OpCo’s ability to borrow funds 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.

For a description of additional restrictions and factors that may affect our ability to pay cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis we would not have had sufficient adjusted current earnings to pay the full minimum quarterly distribution on all units for the year ended December 31, 2013 and for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, with shortfalls of $1.3 million for the year ended December 31, 2013 and $3.1 million, $0.1 million and $0.6 million, for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, respectively.

The amount of pro forma adjusted current earnings for the year ended December 31, 2013 would have been approximately $26.6 million. This amount would have been sufficient to pay 100% of the minimum quarterly distribution on all common units for that period. However, our pro forma adjusted current earnings for the year ended December 31, 2013 would only allow us to pay aggregate cash distributions of $0.9968, or approximately 90.6% of the minimum quarterly distribution, on all of our subordinated units. Specifically, on a pro forma basis, we would have experienced a shortfall of approximately $1.3 million for the year ended December 31, 2013 and $3.1 million, $0.1 million and $0.6 million for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, respectively, relative to the aggregate minimum quarterly distribution for each of those quarters. For a calculation of our ability to make distributions to unitholders based on our pro forma results for the year ended December 31, 2013 and the twelve months ended March 31, 2014, please read “Cash Distribution Policy and Restrictions on Distributions.”

The assumptions underlying our forecast of adjusted current earnings included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our cash available for distribution to differ materially from those estimates.

The forecast of earnings set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of OpCo’s results of operations and our cash available for distribution for the twelve months ending June 30, 2015. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct, which are discussed in “Cash Distribution Policy and Restrictions on Distributions.”

Our forecast of earnings has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of earnings are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive

 

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risks and uncertainties that could cause cash available for distribution to differ materially from that which is forecasted. If OpCo does not achieve our forecasted results, we may not be able to pay the minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Cash Distribution Policy and Restrictions on Distributions.”

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.

Our ability to make distributions to unitholders will be substantially dependent on Westlake’s ability to meet its minimum contractual obligations under the Ethylene Sales Agreement. 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.

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.

OpCo is a restricted subsidiary and guarantor under Westlake’s credit facility and the indentures governing its senior notes. Restrictions in the indentures could limit OpCo’s ability to make distributions to us.

All of our cash will be generated from cash distributions from OpCo. Westlake’s credit facility and the indentures governing its senior notes impose significant operating and financial restrictions on OpCo. These restrictions limit OpCo’s ability to:

 

   

make investments and other restricted payments;

 

   

incur additional indebtedness or issue preferred stock;

 

   

create liens;

 

   

sell all or substantially all of its assets or consolidate or merge with or into other companies; and

 

   

engage in transactions with affiliates.

In addition, the indentures governing Westlake’s senior notes will prevent OpCo from making distributions to us if any default or event of default (as defined in the indentures) exists.

These limitations are subject to a number of important qualifications and exceptions. However, the effectiveness of many of these restrictions in the indentures governing Westlake’s senior notes is currently suspended under the indentures because the senior notes are currently rated investment grade by at least two nationally recognized credit rating agencies.

These covenants may adversely affect OpCo’s ability to finance future business opportunities. A breach of any of these covenants could result in a default in respect of the related debt. If a default occurred, the relevant lenders could elect to declare the debt, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that debt, including OpCo and its assets. In addition, any acceleration of debt under Westlake’s credit facility will constitute a default under some of Westlake’s other debt, including the indentures governing its senior notes, each of which OpCo has guaranteed.

Substantially all of OpCo’s sales are generated at three facilities located at two sites. 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.

OpCo’s operations are subject to significant hazards and risks inherent in ethylene production operations. These hazards and risks include, but are not limited to, equipment malfunction, explosions, fires and the effects

 

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of severe weather conditions, any of which could result in production and transportation difficulties and disruptions, pollution, personal injury or wrongful death claims and other damage to our properties and the property of others. There is also risk of mechanical failure of OpCo’s facilities both in the normal course of operations and following unforeseen events. Any adverse developments at any of OpCo’s facility could have a material adverse effect on our results of operations and therefore our ability to distribute cash to unitholders.

Because substantially all of OpCo’s sales are generated at three facilities located at two sites, any such events at any facility or site could significantly disrupt OpCo’s ethylene production and its ability to supply ethylene to its customers. Any sustained disruption in its ability to meet its supply obligations under the Ethylene Sales Agreement could have a material adverse effect on our results of operations and therefore our ability to distribute cash to unitholders.

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 costs, which will reduce our net operating profit.

The purchase price under the Ethylene Sales Agreement will be based on OpCo’s actual ethane, other feedstock and natural gas costs and an annual estimate of other operating costs and maintenance capital expenditures and other turnaround expenditures. The price is designed to permit OpCo to recover the portion of its costs of feedstocks and other costs to operate the ethylene production facilities associated with the percentage of its production capacity purchased by Westlake and generate a fixed margin per pound of ethylene purchased. The ethylene sales price will not increase to cover our public partnership costs, which will reduce our net operating profit.

The fee structure of the Ethylene Sales Agreement will limit OpCo’s ability to take advantage of favorable market developments.

The Ethylene Sales Agreement sets a $0.10 per pound margin for a substantial majority of OpCo’s ethylene production, limiting OpCo’s ability to take advantage of decreased ethane and other feedstock prices, increased ethylene prices or other favorable market developments. Under these circumstances, OpCo may not be in a position to enable its partners, including us, to benefit from favorable market developments through increased distributions. In addition, under these circumstances, OpCo may be disadvantaged relative to those of its competitors that are in a better position to take advantage of favorable market developments.

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.

Westlake’s obligations under the Ethylene Sales Agreement, the Feedstock Supply Agreement and the related services and secondment agreement will become terminable by either party commencing December 31, 2026. 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.

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. If OpCo is not able to renew the site lease agreements or if the site lease agreements are terminated by Westlake, OpCo may have to relocate Lake Charles Olefins and Calvert City Olefins, abandon the assets or sell the assets to Westlake.

OpCo will enter into two site lease agreements with Westlake pursuant to which Westlake has agreed to (i) lease to OpCo the real property underlying Lake Charles Olefins and Calvert City Olefins, respectively, and (ii) grant OpCo rights to access and use certain other portions of Westlake’s ethylene production facilities that are necessary to operate OpCo’s units at such ethylene production facilities. The site lease agreements each have a term

 

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of 50 years and may be renewed if agreed to by the parties. If an event of default with respect to bankruptcy of OpCo occurs, if Westlake terminates the Ethylene Sales Agreement in accordance with its provisions either for cause or due to a force majeure event, or if OpCo ceases to operate Lake Charles Olefins or Calvert City Olefins for six consecutive months (other than due to force majeure or construction following a casualty loss), Westlake may terminate the applicable site lease following notice and expiration of a cure period to remedy the default. In addition, if OpCo fails to act in good faith to expeditiously restore Lake Charles Olefins or Calvert City Olefins following a casualty loss, Westlake has the ability to terminate the applicable site lease agreement, to restore Lake Charles Olefins or Calvert City Olefins, as the case may be, and to purchase such ethylene production facility at fair market value. If OpCo is unable to renew the site lease agreements or if Westlake terminates one or both of the site lease agreements, OpCo may have to relocate Lake Charles Olefins and Calvert City Olefins, abandon the assets or sell the assets to Westlake, the result of which may have a material adverse effect on our business, results of operations and financial condition.

OpCo depends upon Westlake for numerous services and for its labor force.

In connection with this offering, OpCo will enter into a services and secondment agreement with Westlake pursuant to which Westlake will be obligated to provide OpCo operating services, utility access services and other key site services. Westlake will provide the services of certain of its employees, who will act as OpCo’s agents in operating and maintaining OpCo’s ethylene production facilities. If this agreement is terminated or if Westlake or its affiliates fail to satisfactorily provide these services or employees, OpCo would be required to hire labor, provide these services internally or find a third-party provider of these services. Any services or labor OpCo chooses to provide internally may not be as cost effective as those that Westlake or its affiliates provide, particularly in light of OpCo’s lack of experience as an independent organization. If OpCo is required to obtain these services or labor from a third party, it may be unable to do so in a timely, efficient and cost-effective manner, the services or labor it receives may be inferior to or more costly than those that Westlake is currently providing, or such services and labor may be unavailable. Moreover, given the integration of OpCo’s ethylene production facilities and Westlake’s Lake Charles and Calvert City complexes, 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.

OpCo’s ability to increase throughput volumes through its assets is constrained by the capacity limitations of those assets, which are currently operating at close to full capacity. OpCo’s ability to increase its cash flow by selling ethylene to third parties may be limited by the Ethylene Sales Agreement. OpCo’s ability to sell ethylene to third parties is limited to available excess capacity, since Westlake has the right to purchase the substantial majority of production from OpCo’s facilities through its minimum purchase commitment and option to purchase additional ethylene under the Ethylene Sales Agreement. The Ethylene Sales Agreement provisions may prohibit OpCo from competing effectively for third party business for this excess production given the limited volumes available for sale. For example, so long as Westlake is not in default under the Ethylene Sales Agreement, Westlake has the right to purchase 95% of OpCo’s production in excess of planned capacity.

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.

The amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. 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.

 

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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 strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in our cash distributions per unit. If we are unable to make acquisitions of additional interests in OpCo from Westlake on acceptable terms or we are unable to obtain financing for these acquisitions, our future growth and ability to increase distributions will be limited. In addition, we may be unable to make acquisitions from third parties as an alternative avenue to growth. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in our cash distributions per unit. 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.

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of our funds and other resources.

Many of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future. In addition, while we intend to establish cash reserves in order to cover turnaround expenditures, the amounts we reserve may not be sufficient to fully cover such expenditures.

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. In addition, while we intend to establish cash reserves in order to cover our turnaround expenditures, the amounts we reserve may be insufficient to fully cover such expenditures. Any significant and unexpected increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to pay cash distributions.

Regulations concerning the transportation of hazardous chemicals and the security of chemical manufacturing facilities could result in higher operating costs.

Targets such as chemical manufacturing facilities may be at greater risk of terrorist attacks than other targets in the U.S. As a result, the chemical industry responded to the issues surrounding the terrorist attacks of September 11, 2001 by starting initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the U.S. Simultaneously, local, state and federal governments began a regulatory process that led to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Our business or our customers’ businesses could be adversely affected because of the cost of complying with these regulations.

 

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Our production facilities process volatile and hazardous materials that subject us to operating risks that could adversely affect our operating results.

Our operations are subject to the usual hazards associated with commodity chemical and plastics 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

 

   

terrorist attacks.

Global climate change could result in heightened hurricane activity in the Gulf of Mexico. If this materializes, severe weather and natural disaster hazards could pose an even greater risk for our facilities, particularly those in Louisiana.

All these hazards can cause personal injury and loss of life, catastrophic damage to or destruction of property and equipment and environmental damage, and may result in a suspension of operations and the imposition of civil or criminal penalties. We could become subject to environmental claims brought by governmental entities or third parties. A loss or shutdown of operations over an extended period at any one of our three major operating facilities would have a material adverse effect on us. 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. 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.

Our operations and assets are subject to extensive environmental, health and safety laws and regulations.

We will 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. As such, we are subject to extensive federal, state and local laws and regulations pertaining to pollution and protection of the environment, health and safety, which govern, among other things, emissions to the air, discharges onto land or waters, the maintenance of safe conditions in the workplace, the remediation of contaminated sites, and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations and require the installation of costly pollution control

 

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equipment or operational changes to limit pollution emissions and/or reduce the likelihood or impact of hazardous substance releases, whether permitted or not. For example, our petrochemical facilities may require improvements to comply with certain changes in process safety management requirements.

Our operations produce greenhouse gas (“GHG”) emissions, which have been the subject of increased scrutiny both among members of the international community and in the U.S. Some scientific studies have suggested that GHG emissions may be contributing to warming of the earth’s atmosphere and other climatic changes. In 2005, the Kyoto Protocol to the 1992 United Nations Framework Convention on Climate Change, which establishes a binding set of emission targets for GHG emissions, became binding on the countries that had ratified it. International discussions are underway to develop a treaty to replace the Kyoto Protocol after its expiration in 2020. Legislation to regulate GHG emissions has also been introduced in the U.S. Congress, and there has been a wide-ranging policy debate regarding the impact of these gases and possible means for their regulation. Some of the proposals would require industries to meet stringent new standards that would require substantial reductions in carbon emissions. Those reductions could be costly and difficult to implement. The United States Environmental Protection Agency (the “EPA”) has adopted rules requiring the reporting of GHG emissions from specified large GHG emission sources on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010, as well as from certain oil and natural gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011. Further, following a finding by the EPA that certain GHGs represent an endangerment to human health, the EPA finalized a rule to address permitting of GHG emissions from stationary sources under the Clean Air Act’s New Source Review Prevention of Significant Deterioration (“PSD”) and Title V programs. This final rule “tailors” the PSD and Title V programs to apply to certain stationary sources of GHG emissions in a multi-step process, with the largest sources first subject to permitting. Facilities required to obtain PSD permits for their GHG emissions also will be required to reduce those emissions according to “best available control technology” standards for GHGs that will be established by the states or, in some instances, by the EPA on a case-by-case basis.

Several states or geographic regions in the U.S. have also adopted legislation and regulations to reduce emissions of GHGs. Additional legislation or regulation by these states and regions, the EPA, and/or any international agreements to which the U.S. may become a party, that control or limit GHG emissions or otherwise seek to address climate change could adversely affect our energy supply and costs, the costs of raw materials derived from fossil fuels, our general costs of production and the demand for our products. The cost of complying with any new law, regulation or treaty will depend on the details of the particular program.

We also may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our facilities or to chemicals that we otherwise manufacture, handle or own. Although these types of claims have not historically had a material impact on our operations, a significant increase in the success of these types of claims could have a material adverse effect on our business, financial condition, operating results or cash flow.

Environmental laws may have a significant effect on the nature and scope of, and responsibility for, cleanup of contamination at our current and former operating facilities, the costs of transportation and storage of raw materials and finished products, the costs of reducing emissions and the costs of the storage and disposal of wastewater. The U.S. 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 wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such potentially responsible parties (or any one of them, including us) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. In addition, CERCLA and similar state laws could impose liability for damages to natural resources caused by contamination.

Although we seek to take preventive action, our operations are inherently subject to accidental spills, discharges or other releases of hazardous substances that may make us liable to governmental entities or private

 

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parties. This may involve contamination associated with our current and former facilities, facilities to which we sent wastes or by-products for treatment or disposal and other contamination. Accidental discharges may occur in the future, future action may be taken in connection with past discharges, governmental agencies may assess damages or penalties against us in connection with any past or future contamination, or third parties may assert claims against us for damages allegedly arising out of any past or future contamination. In addition, we may be liable for existing contamination related to certain of our facilities for which, in some cases, we believe third parties are liable in the event such third parties fail to perform their obligations.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflicts involving the U.S. could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from customers or disruptions of fuel supplies and markets if domestic and global utilities are direct targets or indirect casualties of an act of terror or war. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.

Risks Inherent in an Investment in Us

Westlake owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Westlake, have conflicts of interest with us and limited duties, and they may favor their own interests to our detriment and that of our unitholders.

Following the offering, Westlake will own and control our general partner and will appoint all of the directors of our general partner. Although our general partner has a duty to manage us in a manner that it believes is not adverse to our interest, the executive officers and directors of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to Westlake. Therefore, conflicts of interest may arise between Westlake or any of its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our common unitholders. 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

 

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expansion capital expenditure, which does not reduce operating surplus. Please read “How We Make Distributions to Our Partners—Capital Expenditures” for a discussion on when a capital expenditure constitutes a maintenance capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash from operating surplus that is distributed to our unitholders which, in turn, may affect the ability of the subordinated units to convert. Please read “How We Make Distributions to Our Partners—Subordination Period;”

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;

 

   

our partnership agreement permits us to distribute up to $28.0 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or 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 of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.

In addition, we may compete directly with Westlake and entities in which it has an interest for acquisition opportunities and potentially will compete with these entities for new business or extensions of the existing services provided by us. Please read “—Westlake and other affiliates of our general partner may compete with us” and “Conflicts of Interest and Fiduciary Duties.”

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $0.2750 per unit on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion and could elect not to pay distributions for one or more quarters. Please read “Cash Distribution Policy and Restrictions on Distributions.”

In addition, our partnership agreement does not require us to pay any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amount we distribute to our unitholders. The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests

 

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may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of Westlake to the detriment of our common unitholders.

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. 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.

We expect to distribute a significant portion of our available cash to our partners, which could limit our ability to grow and make acquisitions.

We plan to distribute most of our available cash, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the 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.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate business opportunities among us and its affiliates;

 

   

whether to exercise its call right;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to exercise its registration rights;

 

   

whether to elect to reset target distribution levels; and

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

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Our partnership agreement restricts the remedies available to holders of our units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. 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 of our general partner, 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.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, other than one where our general partner is permitted to act in its sole discretion, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

Our partnership agreement provides that the conflicts committee of the board of directors of our general partner may be comprised of one or more independent directors. If the board of directors of our general partner establishes a conflicts committee with only one independent director, your interests may not be as well served as if we the conflicts committee was comprised of at least two independent directors. 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. 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. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such

 

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opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

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 general partner’s board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

The holder or holders of a majority of our incentive distribution rights (initially Westlake) have the right, at any time when there are no subordinated units outstanding and we have made cash distributions in excess of the then-applicable third target distribution for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution levels at the time of the exercise of the reset election. Following a reset election by such holder or holders, the minimum quarterly distribution will be calculated equal to an amount equal to the prior cash distribution per common unit for the fiscal quarter immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. If such holder or holders elects to reset the target distribution levels, they will be entitled to receive common units as consideration for such election. The number of common units to be issued to such holder or holders will equal the number of common units that would have entitled the holder to an aggregate quarterly cash distribution for the quarter prior to the reset election equal to the distribution on the incentive distribution rights for the quarter prior to the reset election.

Westlake could exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per unit without such conversion. However, Westlake may transfer the incentive distribution rights at any time. It is possible that Westlake or a transferee could exercise this reset election at a time when we are experiencing declines in our aggregate cash distributions or at a time when the holders of the incentive distribution rights expect that we will experience declines in our aggregate cash distributions in the foreseeable future. In such situations, the holders of the incentive distribution rights may be experiencing, or may expect to experience, declines in the cash distributions it receives related to the incentive distribution rights and may therefore desire to be issued our common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units to the holders of the incentive distribution rights in connection with resetting the target distribution levels. Please read “How We Make Distributions To Our Partners—IDR Holders’ Right to Reset Incentive Distribution Levels.”

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 will trade.

Compared to the holders of common stock in a corporation, unitholders have limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by Westlake, as a result of it owning our general partner, and not by our unitholders. Please read “Management—Management of Westlake Chemical Partners LP” and “Certain Relationships and Related Transactions.” Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

 

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Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. 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. Following the closing of this offering, Westlake will own an aggregate of 55.7% of our common and subordinated units (or 52.2% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. Both of these conditions will provide Westlake the ability to prevent the removal of our general partner.

Unitholders will experience immediate and substantial dilution of $17.52 per common unit.

The assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) exceeds our pro forma net tangible book value of $2.48 per common unit. Based on the assumed initial public offering price of $20.00 per common unit, unitholders will incur immediate and substantial dilution of $17.52 per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with GAAP, and not their fair value. Please read “Dilution.”

Control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party without the consent of our unitholders. Furthermore, our partnership agreement permits Westlake to transfer ownership of our general partner to a third party, also without the consent of our unitholders. The new owner of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with its own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.

The incentive distribution rights may be transferred to a third party without unitholder consent.

Westlake may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If Westlake transfers the incentive distribution rights to a third party, it would not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time. For example, a transfer of incentive distribution rights by Westlake could reduce the likelihood of it accepting offers made by us relating to assets owned by Westlake, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (i) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (ii) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and

 

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may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from causing us to issue additional common units and then exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Upon consummation of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, Westlake will own an aggregate of 55.7% of our common and subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), Westlake will own 55.7% of our common units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. 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;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

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 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.

After this offering, we will have 12,686,115 common units and 12,686,115 subordinated units outstanding, which includes the 11,250,000 common units we are selling in this offering that may be resold in the public market immediately. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. All of 1,436,115 common units that are issued to Westlake will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters, which may be waived in the discretion of certain of the underwriters. Sales by Westlake or other large holders of a substantial number of our common units in the public markets following this offering, 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. In addition, we have agreed to provide registration rights to Westlake. Under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold. Please read “Units Eligible for Future Sale.”

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

 

 

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Cost reimbursements due to our general partner and Westlake for services provided to us or on our behalf will reduce our earnings and therefore our cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.

We are obligated under our partnership agreement to reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf, including expenses we and OpCo will incur under the services and secondment agreement and the omnibus agreement. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include all expenses incurred under the services and secondment agreement and the omnibus agreement, including include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of our earnings and therefore our ability to distribute cash to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

Prior to this offering, there has been no public market for the common units. After this offering, there will be only 11,250,000 publicly traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for our common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

the other factors described in these “Risk Factors.”

Unitholders may have liability to repay distributions.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible

 

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distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

If we fail to establish and maintain effective internal controls over financial reporting, our ability to accurately report our financial results could be materially adversely affected.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of Sarbanes-Oxley, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal controls over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of Sarbanes-Oxley. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

The New York Stock Exchange does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

We have applied to list our common units on the NYSE. Because we will be a publicly traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Westlake Chemical Partners LP.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, Sarbanes-Oxley and rules implemented by the SEC and the NYSE require publicly traded entities to adopt various corporate governance practices that will further increase our costs. The amount of our expenses or reserves for expenses, including the costs of being a publicly traded partnership will reduce the amount of cash we have for distribution to our unitholders. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a public company.

 

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Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded company, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on the board of directors of our general partner or as executive officers.

We estimate that we will incur approximately $3.0 million of incremental annual general and administrative expenses as a result of being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution to you would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

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, we believe we satisfy the qualifying income requirement. We have requested and obtained a favorable private letter ruling from the IRS to the effect that the production, transportation, storage and marketing of ethylene and its co-products will constitute “qualifying income” within the meaning of Section 7704 of the Code. However, no ruling has been or will be requested from the IRS 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.

If we were treated as a corporation for federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you 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 the unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for U.S. federal, state, local or foreign income tax purposes, the minimum quarterly distribution amount and the target

 

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distribution amounts may be adjusted to reflect the impact of that law or interpretation on us. At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Specifically, we will initially own assets and conduct business in Louisiana, Kentucky and Texas and such states impose a margin or franchise tax. In the future, we may expand our operations. Imposition of a similar tax on us in other jurisdictions that we may expand to could substantially reduce our cash available for distribution to you.

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. One such legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes. For a discussion of the importance of our treatment as a partnership for federal income purposes, please read “Material U.S. Federal Income Tax Consequences—Partnership Status” for a further discussion.

If the IRS were to contest the federal income tax positions we take, it may adversely impact the market for our common units, and the costs of any such contest would reduce our cash available for distribution to our unitholders.

The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. 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.

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes, on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

Tax gain or loss on disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the

 

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amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopted.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered as having

 

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disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We may adopt certain valuation methodologies that could result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any 12-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Immediately following this offering, Westlake will own 55.7% of the total interests in our capital and profits. Therefore, a transfer by Westlake of all or a portion of its interests in us could, in conjunction with the trading of common units held by the public, result in a termination of our partnership for federal income tax purposes. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once.

Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns for one calendar year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in taxable income for the unitholder’s taxable year that includes our termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but it would result in our being treated as a new partnership for U.S. federal income tax purposes following the termination. If we were treated as a new partnership, we would be required to make new tax elections and could be subject to penalties if we were unable to determine that a termination occurred. The IRS recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

 

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You will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements.

We will initially own assets and conduct business in Kentucky, Louisiana and Texas; Kentucky and Louisiana currently impose a personal income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We intend to use the estimated net proceeds of approximately $207.1 million from this offering (based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, structuring fee and offering expenses, 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 us in connection with the formation transactions, will result in our ownership of a 10% limited partner interest in OpCo following the closing of the offering.

We estimate that, during the period from two years before the anticipated date of closing of this offering through July 31, 2013, Westlake incurred approximately $151.7 million in capital expenditures (the “Pre-August 2013 Capex”) with respect to the assets contributed to OpCo. The portion of these capital expenditures incurred before January 1, 2013 was not accounted for as a liability in our Predecessor’s historical combined carve-out financial data but as Net investment, as it was equity funded, and the portion of these capital expenditures incurred from January 1, 2013 and through July 31, 2013 was accounted for as a liability and is reflected on our Predecessor’s historical combined carve-out financial data and the associated liability will be retained by Westlake in connection with the closing of this offering. Based on an assumed initial offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover of this prospectus, OpCo will use any remaining net proceeds from this offering (after deducting estimated underwriting discounts, structuring fee, offering expenses and $55.4 million to establish the turnaround reserve) to reimburse Westlake for these capital expenditures. If the actual amount of capital expenditures incurred is lower than our estimate, any remaining net proceeds after reimbursing Westlake for such lower capital expenditures will be used to repay intercompany debt to Westlake under the August 2013 Promissory Notes, as described below.

If the underwriters exercise their option to purchase 1,687,500 additional common units in full, the additional net proceeds would be approximately $31.6 million (based upon the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to purchase an additional limited partner interest in OpCo, and OpCo will use such net proceeds to first reimburse Westlake for any remaining Pre-August 2013 Capex and then to repay intercompany debt to Westlake under the August 2013 Promissory Notes, as described below. The amount of the additional interest in OpCo purchased will depend on the amount of the option exercised, and will be calculated at approximately 0.4% additional limited partner interest in OpCo purchased for each one million of additional common units purchased by the underwriters. If the underwriters exercise their option to purchase additional common units in full, we would purchase an additional 0.6% limited partner interest in OpCo and our total ownership interest in OpCo would be 10.6%.

As of June 30, 2014, our Predecessor had $231.1 million in outstanding indebtedness payable to Westlake under the intercompany notes that OpCo will assume in connection with this offering and may repay, in part, with a portion of the net proceeds from this offering. Our Predecessor used the amounts loaned under these notes (the “August 2013 Promissory Notes”) to fund capital expenditures after August 1, 2013. Each of the intercompany notes has a maturity date of August 1, 2023 and bears interest at the prime rate plus 1.5%.

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount and offering expenses payable by us, to increase or decrease, respectively, by approximately $10.5 million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of one million common units offered by us, together with a concomitant $1.00 per unit increase in the assumed public offering price to $21.00 per common unit, would increase net proceeds to us from this offering by approximately $30.2 million. Similarly, each decrease of one million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial offering price to $19.00 per common unit, would decrease the net proceeds to us from this offering by approximately $28.3 million. If we increase or decrease the number of common units offered, we will proportionately increase or decrease, respectively, the percentage interest in OpCo which we will

 

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purchase with the net proceeds of this offering and OpCo may concomitantly increase or reduce, as applicable, the amount of Westlake reimbursement for Pre-August 2013 Capex and amount of intercompany debt repayment under the August 2013 Promissory Notes, with the result being the same expected adjusted current earnings per unit if the number of common units had not been changed.

 

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CAPITALIZATION

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our Predecessor as of March 31, 2014; and

 

   

our pro forma cash and cash equivalents and capitalization as of March 31, 2014 giving effect to the pro forma adjustments in our unaudited pro forma combined carve-out financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds.”

This table is derived from, and should be read in conjunction with, the unaudited pro forma combined carve-out financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Prospectus Summary—Formation Transactions and Partnership Structure,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2014  
     Historical
(Predecessor)
     Pro Forma
(Partnership)
 
    

(unaudited)

(dollars in thousands)

 

Cash and cash equivalents(1)

   $ —         $ 55,419   
  

 

 

    

 

 

 

Long-term debt payable to Westlake(2)

   $ 302,357       $ 160,164   

Net equity/Partners’ capital

     

Total sponsor’s net equity

     407,093         —     

Common units—public(3)

     —           207,125   

Common units—Westlake(3)

     —           3,955   

Subordinated units—Westlake(3)

     —           34,941   

General partner interest(3)

     —           (175,912

Noncontrolling interest(4)

     —           630,979   
  

 

 

    

 

 

 

Total capitalization

   $ 709,450       $ 861,252   
  

 

 

    

 

 

 

 

(1) Pro forma amount reflects the initial turnaround reserve balance from the proceeds contributed to OpCo by us in connection with this offering. The initial turnaround reserve will account for the period that the ethylene production facilities were under Westlake’s ownership following the last major turnaround and prior to the entry into the Ethylene Sales Agreement.
(2) Historical amount includes $142.2 million of indebtedness that will be retained by our Predecessor.
(3) Pro forma amounts reflect the capital attributable to our limited and general partners. Pro forma Partners’ capital assumes offering proceeds of $207.1 million, net of underwriters’ discount and other expenses and costs of the initial public offering of $14.6 million and $3.3 million, respectively, all of which were allocated to the public common units. Pro forma Partners’ capital also reflects an increase of $238.6 million for the impact of eliminating Predecessor’s assets and liabilities not contributed to OpCo, as well as a $631.0 million and a $151.7 million decrease for the capital attributable to the Noncontrolling interest in OpCo, and the distribution to Westlake of cash from this initial public offering, respectively. The general partner interest reflects the excess of the consideration paid by us to purchase an additional controlling interest in OpCo, over the historical carrying value of the additional interest acquired.
(4) Pro forma amount reflects the 90% Noncontrolling interest held by Westlake in OpCo.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Assuming an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus), on a pro forma basis as of March 31, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $63.0 million, or $2.48 per common unit. Purchasers of our common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

     $ 20.00   

Pro forma net tangible book value per common unit before the offering(1)

   $ 2.45     

Increase in net tangible book value per common unit attributable to purchasers in the offering due to the purchase of additional interest in OpCo

     0.63     

Decrease in net tangible book value per common unit attributable to purchasers in the offering due to distributions to Westlake of proceeds from the offering

     (0.60  
  

 

 

   

Less: Pro forma net tangible book value per common unit after the offering(2)

       2.48   
    

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(3)(4)

     $ 17.52   
    

 

 

 

 

(1) Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (1,436,115 common units and 12,686,115 subordinated units) to be issued to Westlake and its affiliates for their contribution of assets and liabilities to us. See also “Unaudited Pro Forma Combined Carve-out Financial Statements of Westlake Chemical Partners LP.”
(2) Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (12,686,115 common units and 12,686,115 subordinated units) to be outstanding after the offering. When calculating pro forma net tangible book value per common unit, our proportionate limited partner interest in goodwill and intangible assets and deferred charges amounts of approximately $5.9 million and $64.7 million respectively, are excluded from the calculation of pro forma net tangible book value.
(3) Each $1.00 increase or decrease in the assumed public offering price of $20.00 per common unit would increase or decrease our pro forma net tangible book value by approximately $2.5 million, or approximately $0.10 and $0.08 per common unit, respectively, and increase or decrease dilution per common unit to investors in this offering by approximately $0.90 and $0.92 per common unit, respectively, after deducting the estimated underwriting discount and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of one million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $21.00 per common unit, would result in a pro forma net tangible book value of approximately $69.7 million, or $2.64 per common unit, and dilution per common unit to investors in this offering would be $18.36 per common unit. Similarly, a decrease of one million common units offered by us, together with a concomitant $1.00 decrease in the assumed public offering price to $19.00 per common unit, would result in an pro forma net tangible book value of approximately $57.1 million, or $2.34 per common unit, and dilution per common unit to investors in this offering would be $16.66 per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(4) Assumes no exercise of the underwriters’ option to purchase additional common units from us. After giving effect to the full exercise of the underwriters’ option to purchase 1,687,500 additional common units from us, the pro forma net tangible book value per common unit after the offering would be $70.0 million, resulting in an immediate dilution in net tangible book value to purchasers in the offering of $2.76 per common unit.

 

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The following table sets forth the number of units that we will issue and the total consideration contributed to us by Westlake and by the purchasers of our common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units     Total Consideration  
    

Number

     Percent     Amount     Percent  
                  (in thousands of
dollars)
       

Westlake(1)(2)(3)

     14,122,230         55.7     (137,016     (195.4 )% 

Purchasers in the offering(4)

     11,250,000         44.3     207,125        295.4
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     25,372,230         100.0     70,109        100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, Westlake will own 1,436,115 common units and all of the subordinated units.
(2) The assets contributed by Westlake will be recorded at historical cost. The pro forma book value of the consideration provided by Westlake as of March 31, 2014 would have been approximately $38.9 million.
(3) Book value of the consideration provided by Westlake, as of March 31, 2014, after giving effect to the net proceeds of the offering is as follows:

 

Westlake’s initial contribution to us of certain limited and all of the general partner interest in OpCo(i)

   $ 38,896   

Add:

  

Net book value of the additional limited partner interest in OpCo purchased by us using the net proceeds from this offering(ii)

     31,213   

Less:

  

Consideration paid by us to OpCo for the purchase of our additional limited partner interest in OpCo

     (207,125
  

 

 

 

Decrease in the General partner interest resulting from us purchasing of an additional interest in OpCo(iii)

     (175,912
  

 

 

 

Total consideration

   $ (137,016
  

 

 

 

 

  (i) Represents our proportionate limited partner interest in the historical carrying value of OpCo’s net assets prior to this offering.
  (ii) Represents the purchase of our additional limited partner interest in OpCo, recorded at the historical carrying value of OpCo’s net assets after giving effect to the $207.1 million equity contribution and the $151.7 million distribution to Westlake.
  (iii) Represents the excess of (i) the consideration paid by us to purchase our additional limited partner interest in OpCo with the net proceeds from this offering over (ii) the historical carrying value of the additional interest acquired in OpCo’s net assets.

 

(4) Assumes the underwriters’ option to purchase additional common units is not exercised.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, you should refer to Westlake Chemical Partners LP Predecessor’s audited historical combined carve-out financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 and its unaudited historical combined carve-out financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013, as well as our unaudited pro forma combined carve-out financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and the year ended December 31, 2013, included elsewhere in this prospectus.

General

Our Cash Distribution Policy

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute at least the minimum quarterly distribution of $0.2750 per unit ($1.10 per unit on an annualized basis) on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. We expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our earnings resulting from such growth. We intend to cause OpCo to establish a cash reserve of approximately $55.4 million, funded from proceeds of the offering as well as additional cash reserved annually, for future turnaround expenses. Additionally, we expect our general partner may choose to reserve cash in the form of excess distribution coverage from time to time for the purpose of maintaining stability or growth in our quarterly distributions. In addition, our general partner may cause us to borrow amounts to fund distributions in quarters when we generate less cash than is necessary to sustain or grow our cash distributions per unit. Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing rather than retaining our cash.

The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis. The amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will make cash distributions to our unitholders. We do not have a legal or contractual obligation to pay distributions quarterly or on any other basis or at our minimum quarterly distribution rate or at any other rate. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

   

Our cash flow will initially depend completely on OpCo’s distributions to us as one of its partners. The amount of cash OpCo can distribute to its partners will principally depend upon the amount of cash it generates from operations less any reserves that may be appropriate for operating its business. OpCo’s ability to make distributions to us will be subject to restrictions on distributions under Westlake’s indentures governing its senior notes, which OpCo has guaranteed and is a “restricted subsidiary” under. If Westlake is in default under Westlake’s senior notes, OpCo will be unable to make distributions to us. These senior notes are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity.” Please read “Risk Factors—Risks Inherent in

 

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Our Business—OpCo is a restricted subsidiary and guarantor under Westlake’s credit facility and the indentures governing its senior notes. Restrictions in the indentures could limit OpCo’s ability to make distributions to us.”

 

   

We expect to establish reserves for the prudent conduct of OpCo’s business (including reserves for working capital, maintenance capital expenditures, turnarounds, environmental matters, legal proceedings and other operating purposes). Our general partner will have the authority to establish cash reserves for the prudent conduct of our business, including for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish.

 

   

We are obligated under our partnership agreement to reimburse our general partner and its affiliates for all expenses they incur on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available to pay distributions to our unitholders.

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined solely by our general partner.

 

   

Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs.

 

   

If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “How We Make Distributions To Our Partners—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” We do not anticipate that we will make any distributions from capital surplus.

Our Ability to Grow may be Dependent on Our Ability to Access External Expansion Capital

We expect to generally distribute a significant percentage of our cash from operations to our unitholders on a quarterly basis, after the establishment of cash reserves and payment of our expenses. Therefore, our growth may not be as fast as businesses that reinvest most or all of their cash to expand ongoing operations. Moreover, our future growth may be slower than our historical growth. We expect that we will rely primarily upon external financing sources, including borrowings from Westlake, bank borrowings and issuances of debt and equity interests, to fund our expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

Our Minimum Quarterly Distribution

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.2750 per unit for each whole quarter, or $1.10 per unit on an annualized basis. The payment of the full minimum quarterly distribution on all of the common units and subordinated units to be outstanding after completion of this offering would require us to have cash of approximately $7.0 million per quarter, or

 

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$27.9 million per year. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering and the amount of cash needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period (assuming no exercise and full exercise of the underwriters’ option to purchase additional common units):

 

     No exercise of option to purchase
additional common units
     Full exercise of option to purchase
additional common units
 
     Aggregate minimum quarterly
distributions
     Aggregate minimum quarterly
distributions
 
     Number of
Units
     One Quarter      Four Quarters      Number of
Units
     One Quarter      Four Quarters  

Publicly held common units

     11,250,000       $ 3,093,750       $ 12,375,000         12,937,500       $ 3,557,183       $ 14,231,250   

Common units held by Westlake

     1,436,115         394,932         1,579,727         1,436,115         394,932         1,579,727   

Subordinated units held by Westlake

     12,686,115         3,488,681         13,954,727         12,686,115         3,488,682         13,954,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,372,230       $ 6,977,363       $ 27,909,454         27,059,730       $ 7,441,426       $ 29,765,704   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our general partner will initially own a non-economic general partner interest in us, which will not entitle it to receive cash distributions, and hold all of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50%, of the cash we distribute in excess of $0.3163 per unit per quarter.

We expect to pay our distributions on or about the last day of each of February, May, August and November to holders of record on or about the 15th day of each such month. We will adjust the quarterly distribution for the period after the closing of this offering through September 30, 2014, based on the actual length of the period.

Subordinated Units

Westlake will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that for any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution from operating surplus for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. When the subordination period ends, all of the subordinated units will convert into an equal number of common units.

To the extent we do not pay the minimum quarterly distribution from operating surplus on our common units, our common unitholders will not be entitled to receive such payments in the future except during the subordination period. To the extent we have cash from operating surplus in any future quarter during the subordination period in excess of the amount necessary to pay the minimum quarterly distribution to holders of our common units, we will use this excess cash to pay any distribution arrearages on common units related to prior quarters before any cash distribution is made to holders of subordinated units. Please read “How We Make Distributions To Our Partners—Subordination Period.”

Unaudited Pro Forma Adjusted Current Earnings for the Year Ended December 31, 2013 and the Twelve Months Ended March 31, 2014

We expect to use a measure we refer to as “adjusted current earnings,” which we describe below, to assist us in measuring our operating performance and determining whether our earnings support cash distributions. If we had

 

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completed the transactions contemplated in this prospectus on January 1, 2013, our pro forma adjusted current earnings for the year ended December 31, 2013 would have been approximately $26.6 million and our pro forma adjusted current earnings the twelve months ended March 31, 2014 would have been approximately $29.1 million. For the twelve months ended March 31, 2014, this amount would have been sufficient to pay the minimum quarterly distribution of $0.2750 per unit per quarter ($1.10 per unit on an annualized basis) on all of our common units. However, on a pro forma basis we would not have had sufficient adjusted current earnings to pay the minimum quarterly distribution on all units for the year ended December 31, 2013 and the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, with shortfalls of $1.3 million for the year ended December 31, 2013 and $3.1 million, $0.1 million and $0.6 million for the three-month periods ended March 31, 2013, September 30, 2013 and March 31, 2014, respectively.

We define adjusted current earnings as net income plus depreciation and amortization, less contributions for turnaround reserves and maintenance capital expenditures. Adjusted current earnings is not a measure made in accordance with GAAP.

The GAAP measure most directly comparable to adjusted current earnings is net income. Adjusted current earnings should not be considered as an alternative to GAAP net income. You should not consider adjusted current earnings in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because adjusted current earnings may be defined differently by other companies in our industry, our definition of adjusted current earnings may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. We believe that the presentation of adjusted current earnings in this prospectus provides useful information to investors in assessing our results of operations. Since adjusted current earnings takes into account debt costs (other than externally financed expansion capital expenditures, as discussed below), maintenance capital expenditures and contributions to turnaround reserve, we believe it may provide us and investors with a longer term perspective than other non-GAAP financial measures of performance. However, adjusted current earnings has important limitations as an analytical tool because it excludes some but not all items that affect net income and does not take into account changes in working capital. Additionally, because we expect that we will rely primarily upon external financing sources, including borrowings from Westlake, bank borrowings and issuances of debt and equity interests, to fund our expansion capital expenditures, adjusted current earnings does not reflect expansion capital expenditures or the external financing thereof. We expect to incur a substantial amount of expansion capital expenditures in the future, and if we are unable to fund them with external financing sources, they could have an adverse effect on our ability to pay cash distributions. Please read “Estimated Adjusted Current Earnings for the Twelve Months Ending June 30, 2015—Assumptions and Considerations” and “—Capital Expenditures.” Adjusted current earnings is intended to approximate our ability to generate cash for distributions but differences between adjusted current earnings and cash, such as those resulting from changes in working capital, could be material.

The unaudited pro forma combined carve-out financial statements, upon which estimated pro forma adjusted current earnings is based, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the date indicated. We derived the amounts of estimated pro forma adjusted current earnings in the manner described in the table below. As a result, the amount of estimated pro forma adjusted current earnings should only be viewed as a general indication of the amount of adjusted current earnings that we might have generated had we been formed in an earlier period.

Following the completion of this offering, we estimate that we will incur $3.0 million of incremental annual general and administrative expenses as a result of operating as a publicly traded partnership. These incremental general and administrative expenses are not reflected in our unaudited pro forma combined carve-out financial statements and consist of expenses associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance expenses, expenses associated with listing on the NYSE, independent auditor fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director and officer compensation expenses.

 

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Our unaudited pro forma combined carve-out financial statements are derived from the audited historical annual and unaudited historical interim combined carve-out financial statements of Westlake Chemical Partners LP Predecessor, included elsewhere in this prospectus. Our unaudited pro forma combined carve-out financial statements should be read together with “Selected Historical and Pro Forma Combined Carve-out Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited historical annual and unaudited historical interim combined carve-out financial statements of Westlake Chemical Partners LP Predecessor and the notes to those statements included elsewhere in this prospectus.

 

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The following tables illustrate, on a pro forma basis for the year ended December 31, 2013 and the twelve months ended March 31, 2014, the amount of adjusted current earnings we would have generated, assuming that the transactions contemplated in this prospectus had been consummated on January 1, 2013. Certain of the adjustments reflected or presented below are explained in the footnotes to such adjustments.

Westlake Chemical Partners LP Unaudited Pro Forma Adjusted Current Earnings

 

    Pro Forma  
    Three Months Ended     Year Ended
December 31,
2013
 
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
   
    (in millions)  

Net ethylene sales to Westlake(1)

  $ 145.7      $ 221.3      $ 220.4      $ 247.7      $ 835.1   

Net co-product and ethylene sales to third parties

    66.0        105.9        99.3        92.5        363.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

  $ 211.7      $ 327.2      $ 319.7      $ 340.2      $ 1,198.8   

Operating costs and expenses

         

Cost of sales, excluding depreciation and amortization

    147.2        220.3        217.9        224.7        810.1   

Depreciation and amortization

    17.6        17.6        17.6        17.5        70.3   

Selling, general and administrative expenses

    4.5        5.1        4.8        4.5        18.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  $ 169.3      $ 243.0      $ 240.3      $ 246.7      $ 899.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    42.4        84.2        79.4        93.5        299.5   

Net interest and other financial costs(2)

    (0.6     (0.6     (0.6     (0.7     (2.5

Other expense, net

                         (0.2     (0.2

Provision for income taxes(3)

    (0.2     (0.4     (0.4     (0.3     (1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41.6      $ 83.2      $ 78.4      $ 92.3      $ 295.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

         

Depreciation and amortization

    17.6        17.6        17.6        17.5        70.3   

Less:

         

Maintenance capital expenditures

    (7.1     (11.0     (10.8     (11.6     (40.5

Contribution to turnaround reserves

    (5.1     (7.9     (7.7     (8.3     (29.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated pro forma adjusted current earnings(4)

  $ 47.0      $ 81.9      $ 77.5      $ 89.9      $ 296.3   

Less:

         

Estimated pro forma adjusted current earnings attributable to noncontrolling interest in OpCo(5)

    (42.3     (73.7     (69.8     (80.9     (266.7

Incremental general and administrative expenses(6)

    (0.8     (0.8     (0.8     (0.6     (3.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated pro forma adjusted current earnings for Westlake Chemical Partners LP

  $ 3.9      $ 7.4      $ 6.9      $ 8.4      $ 26.6   

Distributions to public common unitholders(7)

    3.1        3.1        3.1        3.4        12.7   

Distributions to Westlake (common and subordinated units)(7)

    0.5        3.6        3.2        4.3        (11.5

Aggregate Minimum Quarterly Distribution(7)

    (7.0     (7.0     (7.0     (7.0     (27.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess (shortfall) of adjusted current earnings needed to pay aggregate Minimum Quarterly Distribution(7)

  $ (3.1   $ 0.4      $ (0.1   $ 1.4      $ (1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

         

EBITDA(8)

  $ 60.0      $ 101.8      $ 97.0      $ 110.8      $ 369.6   

EBITDA attributable to Westlake Chemical Partners LP(8)

  $ 6.0      $ 10.2      $ 9.7      $ 11.1      $ 37.0   

 

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Westlake Chemical Partners LP Unaudited Pro Forma Adjusted Current Earnings

 

     Pro Forma  
     Three Months Ended     Twelve
Months
Ended
March 31,
2014
 
     June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
   
     (in millions)  

Net ethylene sales to Westlake(1)

   $ 221.3      $ 220.4      $ 247.7      $ 246.0      $ 935.4   

Net co-product and ethylene sales to third parties

     105.9        99.3        92.5        87.4        385.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

   $ 327.2      $ 319.7      $ 340.2      $ 333.4      $ 1,320.5   

Operating costs and expenses

          

Cost of sales, excluding depreciation and amortization

     220.3        217.9        224.7        236.2        899.1   

Depreciation and amortization

     17.6        17.6        17.5        17.6        70.3   

Selling, general and administrative expenses

     5.1        4.8        4.5        6.3        20.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 243.0      $ 240.3      $ 246.7      $ 260.1      $ 990.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     84.2        79.4        93.5        73.3        330.4   

Net interest and other financial costs(2)

     (0.6     (0.6     (0.7     (1.6     (3.5

Other expense, net

                   (0.2            (0.2

Provision for income taxes(3)

     (0.4     (0.4     (0.3     (0.3     (1.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 83.2      $ 78.4      $ 92.3      $ 71.4      $ 325.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

          

Depreciation and amortization

     17.6        17.6        17.5        17.6        70.3   

Less:

          

Maintenance capital expenditures

     (11.0     (10.8     (11.6     (10.7     (44.1

Contribution to turnaround reserves

     (7.9     (7.7     (8.3     (6.6     (30.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated pro forma adjusted current earnings(4)

   $ 81.9      $ 77.5      $ 89.9      $ 71.7      $ 321.0   

Less:

          

Estimated pro forma adjusted current earnings attributable to noncontrolling interest in OpCo(5)

     (73.7     (69.8     (80.9     (64.5     (288.9

Incremental general and administrative expenses(6)

     (0.8     (0.8     (0.6     (0.8     (3.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated pro forma adjusted current earnings for Westlake Chemical Partners LP

   $ 7.4      $ 6.9      $ 8.4      $ 6.4      $ 29.1   

Distributions to public common unitholders(7)

     3.1        3.1        3.4        3.1        12.7   

Distributions to Westlake (common and subordinated units)(7)

     3.6        3.2        4.3        2.7        13.8   

Aggregate Minimum Quarterly Distribution(7)

     (7.0     (7.0     (7.0     (7.0     (27.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess (shortfall) of adjusted current earnings needed to pay aggregate Minimum Quarterly Distribution(7)

   $ 0.4      $ (0.1   $ 1.4      $ (0.6   $ 1.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

EBITDA(8)

   $ 101.8      $ 97.0      $ 110.8      $ 90.9      $ 400.5   

EBITDA attributable to Westlake Chemical Partners LP (8)

   $ 10.2      $ 9.7      $ 11.1      $ 9.1      $ 40.1   

 

(1) Inclusive of net sales to Westlake (after giving effect to the reduction for proceeds from the sale of associated co-products) in accordance with the Ethylene Sales Agreement as well as fees paid by Westlake for transportation on the Longview Pipeline.
(2) Includes, on a 100% basis, the interest expense attributable to OpCo’s intercompany borrowings with Westlake.
(3) Includes the estimated pro forma provision for state margin tax.
(4)

We define adjusted current earnings as net income plus depreciation and amortization, less contributions for turnaround reserves and maintenance capital expenditures. Adjusted current earnings is not a measure made in accordance with GAAP. The GAAP measure most directly comparable to adjusted current earnings is net

 

55


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  income, and the table above calculates our pro forma adjusted current earnings by making adjustments from our pro forma net income. Adjusted current earnings may also be viewed as a liquidity measure, which would be most directly comparable to cash flow from operating activities. Adjusted current earnings is not a substitute for cash flow from operating activities, the most directly comparable GAAP financial measure. We have not prepared a pro forma statement of cash flow, and thus have not provided a reconciliation to pro forma cash flow from operating activities. The following table presents a reconciliation of estimated pro forma adjusted current earnings for Westlake Chemical Partners LP to our Predecessor’s cash flow from operating activities for the year ended December 31, 2013 and the quarter ended March 31, 2014. Our future results of operation, including our cash flow from operating activities, will not be comparable to the historical results of our Predecessor primarily because our Predecessor sold ethylene and feedstock to third parties at market prices, whereas the substantial majority of our revenue from ethylene sales will be generated from sales of manufactured ethylene to Westlake on pricing that is expected to generate a fixed margin per pound. This and other differences will result in substantial differences between our Predecessor’s cash flow from operating activities and our future cash flow from operating activities. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.”

 

     Year Ended
December 31, 2013
    Three Months
Ended
March 31, 2014
 
     (in millions)  

Estimated pro forma adjusted current earnings for Westlake Chemical Partners LP

   $ 26.6      $ 6.4   

Add:

    

Incremental general and administrative expenses

     3.0        0.8   

Estimated pro forma adjusted current earnings attributable to noncontrolling interest in OpCo

     266.7        64.5   
  

 

 

   

 

 

 

Estimated pro forma adjusted current earnings

   $ 296.3      $ 71.7   

Add:

    

Maintenance capital expenditures

     40.5        10.7   

Contribution to turnaround reserves

     29.0        6.6   

Less:

    

Depreciation and amortization

     (70.3     (17.6
  

 

 

   

 

 

 

Pro forma net income

   $ 295.5      $ 71.4   

Add:

    

Predecessor retained pro forma adjustments

     251.0        72.5   
  

 

 

   

 

 

 

Predecessor’s net income

   $ 546.5      $ 143.9   

Adjustments to reconcile predecessor net income to predecessor net cash provided by operating activities:

    

Changes in operating assets and liabilities, and other

     16.6        50.4   

Deferred income taxes

     37.1        3.3   

Other, net

     2.3        0.3   
  

 

 

   

 

 

 

Predecessor’s net cash provided by operating activities

   $ 602.5      $ 197.9   

Predecessor’s net cash used for investing activities

   $ (230.1   $ (51.7

Predecessor’s net cash used for financing activities

   $ (372.4   $ (146.2

 

(5) Pro forma adjusted current earnings attributable to noncontrolling interest in OpCo reflects Westlake’s 90% limited partner interest in OpCo.
(6) All incremental costs of being a publicly traded entity are 100% attributable to us and not shared by the non-controlling interest.
(7) Totals may not sum due to rounding.
(8) For a definition of EBITDA, please read “Selected Historical and Pro Forma Combined Carve-out Financial and Operating Data—Non-GAAP Financial Measure.” The following tables present a reconciliation of EBITDA to net income, our most directly comparable financial measure calculated and presented in accordance with GAAP, on a pro forma basis for the year ended December 31, 2013 and the twelve months ended March 31, 2014.

 

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    Pro Forma  
    Three Months Ended     Year Ended
December 31,
2013
 
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
   
    (in millions)  

EBITDA attributable to Westlake Chemical Partners LP

  $ 6.0      $ 10.2      $ 9.7      $ 11.1      $ 37.0   

Add:

         

EBITDA attributable to noncontrolling interest in OpCo

    54.0        91.6        87.3        99.7        332.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 60.0      $ 101.8      $ 97.0      $ 110.8      $ 369.6   

Less:

         

Depreciation and amortization

    (17.6     (17.6     (17.6     (17.5     (70.3

Net interest and other financial costs

    (0.6     (0.6     (0.6     (0.7     (2.5

Provision for income taxes

    (0.2     (0.4     (0.4     (0.3     (1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41.6      $ 83.2      $ 78.4      $ 92.3      $ 295.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Pro Forma  
    Three Months Ended     Twelve
Months
Ended
March 31,
2014
 
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
   
    (in millions)  

EBITDA attributable to Westlake Chemical Partners LP

  $ 10.2      $ 9.7      $ 11.1      $ 9.1      $ 40.1   

Add:

         

EBITDA attributable to noncontrolling interest in OpCo

    91.6        87.3        99.7        81.8        360.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 101.8      $ 97.0      $ 110.8      $ 90.9      $ 400.5   

Less:

         

Depreciation and amortization

    (17.6     (17.6     (17.5     (17.6     (70.3

Net interest and other financial costs

    (0.6     (0.6     (0.7     (1.6     (3.5

Provision for income taxes

    (0.4     (0.4     (0.3     (0.3     (1.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 83.2      $ 78.4      $ 92.3      $ 71.4      $ 325.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted Current Earnings for the Twelve Months Ending June 30, 2015

Set forth below is a statement of estimated adjusted current earnings that reflects a forecast of our ability to generate sufficient cash to make the minimum quarterly distribution on all of our outstanding common and subordinated units for the twelve months ending June 30, 2015, based on assumptions we believe to be reasonable. These assumptions include adjustments giving effect to this offering. We are not required by our partnership agreement or otherwise to calculate our actual distributions using the methodology set forth below.

Our estimated adjusted current earnings reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending June 30, 2015. The assumptions disclosed under “—Assumptions and Considerations” below are those that we believe are significant to our ability to generate such estimated adjusted current earnings. We believe our actual results of operations for the twelve months ending June 30, 2015 will be sufficient to generate our estimated adjusted current earnings for such period; however, we can give you no assurance that such estimated adjusted current earnings will be actually achieved. There will likely be differences between our estimated adjusted current earnings for the twelve months ending June 30, 2015 and our actual results for such period and those differences could be material. If we fail to generate the estimated adjusted current earnings for the twelve months ending June 30, 2015, we may not be able to pay cash distributions on our common units at the minimum quarterly distribution rate or at any rate.

We do not as a matter of course make public projections as to future operations, earnings or other results. However, management has prepared the estimated adjusted current earnings and assumptions set forth below to

 

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substantiate our belief that we will have sufficient earnings to make the minimum quarterly distribution to our unitholders for the twelve months ending June 30, 2015. This prospective financial information was not prepared with a view toward compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the estimated adjusted current earnings necessary for us to pay the full minimum quarterly distribution to all of our unitholders for the twelve months ending June 30, 2015. However, this information is not historical fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. The prospective financial information included in this offering document has been prepared by, and is the responsibility of, our management. PricewaterhouseCoopers LLP has neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this offering document relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

When considering the estimated adjusted current earnings set forth below you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from those supporting such estimated adjusted current earnings. Accordingly, there can be no assurance that the forecast is indicative of our future performance. Inclusion of the forecast in this prospectus is not a representation by any person, including us or the underwriters, that the results in the forecast will be achieved.

We are providing the estimated adjusted current earnings and related assumptions for the twelve months ending June 30, 2015 to supplement our unaudited pro forma and historical combined carve-out financial statements in support of our belief that we will have sufficient earnings to allow us to pay cash distributions on all of our outstanding common and subordinated units for each quarter in the 12-month period ending June 30, 2015 at our stated minimum quarterly distribution rate. Please read below under “—Assumptions and Considerations” for further information as to the assumptions we have made for the preparation of the estimated adjusted current earnings set forth below. The narrative descriptions of our assumptions in “—Assumptions and Considerations” generally compare our estimated adjusted current earnings for the twelve months ending June 30, 2015 with the unaudited pro forma adjusted current earnings for the year ended December 31, 2013 and for the twelve months ended March 31, 2014 presented under “—Unaudited Pro Forma Adjusted Current Earnings for the Year Ended December 31, 2013 and for the Twelve Months Ended March 31, 2014.”

 

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Westlake Chemical Partners LP

Estimated Adjusted Current Earnings

 

     Forecast  
     Three Months Ending     Twelve
Months
Ending
June 30,
2015
 
     September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
   
     (in millions)  

Net ethylene sales to Westlake(1)

   $ 218.7      $ 215.1      $ 206.4      $ 206.7      $ 846.9   

Net co-product and ethylene sales to third parties

     72.0        73.6        75.4        78.4        299.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

   $ 290.7      $ 288.7      $ 281.8      $ 285.1      $ 1,146.3   

Operating costs and expenses

          

Cost of sales, excluding depreciation and amortization

     173.0        171.7        167.3        168.8        680.8   

Depreciation and amortization

     19.7        19.7        20.5        20.5        80.4   

Selling, general and administrative expenses(2)

     4.9        4.9        5.1        5.1        20.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 197.6      $ 196.3      $ 192.9      $ 194.4      $ 781.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     93.1        92.4        88.9        90.7        365.1   

Net interest and other financial costs(3)

     (2.8     (2.9     (3.0     (3.2     (11.9

Provision for income taxes(4)

     (0.4     (0.4     (0.4     (0.4     (1.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 89.9      $ 89.1      $ 85.5      $ 87.1      $ 351.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

          

Depreciation and amortization

     19.7        19.7        20.5        20.5        80.4   

Less:

          

Maintenance capital expenditures

     (19.2     (23.2     (13.1     (13.2     (68.7

Contribution to turnaround reserves

     (7.3     (7.2     (7.4     (7.4     (29.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated adjusted current earnings

   $ 83.1      $ 78.4      $ 85.5      $ 87.0      $ 334.0   

Less:

          

Estimated adjusted current earnings attributable to noncontrolling interest in OpCo(5)

     (75.5     (71.2     (77.6     (79.0     (303.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated adjusted current earnings for Westlake Chemical Partners LP(6)

   $ 7.6      $ 7.2      $ 7.9      $ 8.0      $ 30.7   

Distributions to public common unitholders(7)

     3.1        3.1        3.1        3.1        12.4   

Distributions to Westlake (common and subordinated units)(7)

     3.9        3.9        3.9        3.9        15.5   

Aggregate Minimum Quarterly Distribution(7)

     7.0        7.0        7.0        7.0        27.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of adjusted current earnings over aggregate Minimum Quarterly Distribution(7)

   $ 0.6      $ 0.2      $ 0.9      $ 1.0      $ 2.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

EBITDA(8)

   $ 112.8      $ 112.1      $ 109.4      $ 111.2      $ 445.5   

EBITDA attributable to Westlake Chemical Partners LP(8)

   $ 10.6      $ 10.5      $ 10.3      $ 10.4      $ 41.8   

 

(1) Inclusive of net sales to Westlake (after giving effect to the reduction for proceeds from the sale of associated co-products) in accordance with the Ethylene Sales Agreement as well as fees paid by Westlake for transportation on the Longview Pipeline.
(2) Includes $3.0 million of estimated incremental annual general and administrative expenses that we expect to incur as a result of being a separate publicly traded partnership. The incremental general and administrative expenses will be paid by us and not by OpCo.
(3) Includes, on a 100% basis: interest expense attributable to OpCo’s intercompany borrowings with Westlake; interest income on approximately $55.4 million of the net proceeds from this offering that OpCo will retain to fund future turnaround expenses.
(4) Includes the estimated provision for state margin tax.
(5) Estimated adjusted current earnings attributable to noncontrolling interest in OpCo reflects Westlake’s 90% limited partner interest in OpCo.

 

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(6) Our partnership agreement provides that any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Cash distributions from operating surplus are made differently than cash distributions that we would make from capital surplus. Our partnership agreement provides that we treat all cash distributed as coming from operating surplus until the sum of all cash distributed since the closing of this offering equals the operating surplus from the closing of this offering. Our partnership agreement provides that we treat any amount distributed in excess of operating surplus, regardless of its source, as distributions of capital surplus. We do not anticipate that we will make any distributions from capital surplus. We believe that estimated adjusted current earnings is substantially equivalent to estimated operating surplus generated during the periods shown in the table. For more information, please see “How We Make Distributions to Our Partners—Operating Surplus and Capital Surplus.”
(7) Totals may not sum due to rounding.
(8) For a definition of EBITDA, please read “Selected Historical and Pro Forma Combined Carve-out Financial and Operating Data—Non-GAAP Financial Measure.” The following table presents a reconciliation of EBITDA to net income, our most directly comparable financial measure calculated and presented in accordance with GAAP, on a forecast basis for the twelve months ending June 30, 2015.

 

    Forecast  
    Three Months Ending     Twelve
Months
Ending
June 30,
2015
 
    September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
   
    (in millions)  

EBITDA attributable to Westlake Chemical Partners LP

  $ 10.6      $ 10.5      $ 10.3      $ 10.4      $ 41.8   

Add:

         

EBITDA attributable to noncontrolling interest in OpCo

    102.2        101.6        99.1        100.8        403.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 112.8      $ 112.1      $ 109.4      $ 111.2      $ 445.5   

Less:

         

Depreciation and amortization

    (19.7     (19.7     (20.5     (20.5     (80.4

Net interest and other financial costs

    (2.8     (2.9     (3.0     (3.2     (11.9

Provision for income taxes

    (0.4     (0.4     (0.4     (0.4     (1.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 89.9      $ 89.1      $ 85.5      $ 87.1      $ 351.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Assumptions and Considerations

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending June 30, 2015. While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

General Assumptions and Considerations

We have assumed that our actual production will equal our planned production, such that Westlake will be committed to purchase 95% of our actual production and Westlake’s option to purchase up to 95% of our actual production in excess of planned production will not be applicable. As discussed in this prospectus, a substantial majority of our revenues and expenses will be determined by the Ethylene Sales Agreement and the Feedstock Supply Agreement that were not in place during the historical periods, and accordingly, our forecasted results are not directly comparable with historical periods. While the price of feedstock and natural gas that OpCo pays will

 

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also fluctuate, it is automatically adjusted in the price per pound of ethylene charged to Westlake under the Ethylene Sales Agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Total Operating Revenues

Production Capacity

The following table compares the forecasted annual production capacity at our ethylene production facilities at June 30, 2015 with annual production capacity at December 31, 2013 and March 31, 2014:

 

     Ethylene Facility
Production Capacity
 

Ethylene Facility

   December 31, 2013      March 31, 2014      June 30, 2015  
     (in millions of pounds)  

Lake Charles Olefins

     2,740         2,740         2,740   

Calvert City Olefins

     450         450         630   

The increase in the aggregate production capacity at our ethylene production facilities for the twelve months ending June 30, 2015 compared to the year ended December 31, 2013 and the twelve months ended March 31, 2014 reflects a capital expansion project recently completed at Calvert City Olefins that increased the capacity of that facility by 40%.

Under the terms of the Ethylene Sales Agreement, Westlake will be obligated to purchase 95% of our planned ethylene production for the twelve months ending June 30, 2015 and would have been obligated to purchase 95% of our ethylene production in the year ended December 31, 2013 and the twelve months ended March 31, 2014. We have assumed that the remaining 5% of planned production will be sold to third parties for the twelve month period ending June 30, 2015.

Revenues

We estimate that OpCo will generate total revenue of $1,146.3 million for the twelve months ending June 30, 2015, compared with pro forma total revenue of $1,198.8 million and $1,320.5 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively.

We expect approximately $846.9 million, or 74%, of our total forecasted revenues to be pursuant to the Ethylene Sales Agreement with Westlake and revenues generated by operations on the Longview Pipeline. We expect that approximately $299.4 million, or 26%, of our total forecasted revenues to be generated by sales to third parties. Third party revenues consist of sales of ethylene and co-products of ethylene production, including propylene, crude butadiene, pyrolysis gasoline and hydrogen.

Third party ethylene sales are forecasted based on a market price that is expected during the forecast period. We estimate that the operating margin generated by such ethylene sales will be $45.3 million. This value is derived from estimated ethylene sales prices and feedstock costs as published by Wood Mackenzie, natural gas prices as derived from the futures price of natural gas delivered to the Gulf Coast and our forecast of other costs of sales.

We expect to generate approximately $219.2 million, or 19%, of our total forecasted revenues from sales of co-products produced in conjunction with our production of ethylene. Of this amount, approximately $208.0 million, or 95%, of the co-product sales will be credited against the purchase price for ethylene purchased by Westlake in accordance with the terms of the Ethylene Sales Agreement.

Our forecasted revenues have been determined by reference to historical production capacity utilization at our ethylene production facilities and historical throughput on the Longview Pipeline. Variances between actual

 

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revenues during the forecast period and forecasted revenues will be driven by differences between actual feedstock costs and forecasted feedstock costs, changes in uncommitted volumes from third parties and changes in the market prices of ethylene and co-products sold to third parties.

Under the Ethylene Sales Agreement, one of the major components of the fee (and thus our revenue) will be our actual feedstock costs. Because we forecast that our feedstock costs will decrease (as described below under “—Cost of Sales”), we forecast our revenue to decrease. However, because our gross margin per pound is generally fixed under the Ethylene Sales Agreement and we forecast increased production capacity (as described below under “—Production Capacity”), our net income is expected to increase.

We estimate that our revenues for the forecast period will decrease by approximately $52.5 million and $174.2 million as compared to pro forma revenues for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively. Given the generally fixed nature of our margin under the Ethylene Sales Agreement, our lower revenues, for both periods, are primarily due to lower feedstock costs offset by increased volume at Calvert City Olefins.

The following table compares forecasted revenues to historical pro forma revenues:

 

     Year Ended
December 31, 2013
     Twelve Months Ended
March 31, 2014
     Twelve Months Ending
June  30, 2015
 
     (in millions of dollars)      (in millions of dollars)      (in millions of dollars)  

Sales to Westlake

   $ 835.1       $ 935.4       $ 846.9   

Sales to Third Parties

   $ 363.7       $ 385.1       $ 299.4   

Cost of Sales

Our costs of sales include feedstock costs, natural gas, variable and fixed conversion costs, repairs and maintenance expenses, transportation and distribution expenses and depreciation expense. We estimate that we will incur costs of sales, including depreciation, of approximately $761.2 million for the twelve months ending June 30, 2015 compared to $880.4 million and $969.4 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively, both on a pro forma basis. This decrease in forecasted operating expenses, for both periods, is primarily due to lower feedstock cost driven by a change in feedstock from propane to ethane at Calvert City Olefins. Historically, feedstock and natural gas costs have accounted for the majority of our total cost of sales, and as a result we expect approximately 71% of our total cost of sales for the twelve months ending June 30, 2015 to be attributable to feedstock and natural gas costs. For the volumes sold under the Ethylene Sales Agreement to Westlake, all fluctuations in feedstock and natural gas costs are automatically reflected in the purchase price paid to us by Westlake.

Selling, General and Administrative Expenses

We estimate that our selling, general and administrative expenses will be approximately $20.0 million for the twelve months ending June 30, 2015 compared to $18.9 million and $20.7 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively, both on a pro forma basis. For the twelve months ending June 30, 2015, our forecasted selling, general and administrative expenses consist of:

 

   

Approximately $17.0 million of selling, general and administrative expenses that will be charged to us by Westlake. These expenses primarily relate to information technology, human resources and other financial and administrative services that will be provided to us by Westlake, as well as our allocated share of insurance costs associated with covering our operations under Westlake’s corporate property, casualty, pollution and general liability policies. We will pay Westlake for our allocated share of these expenses on the basis of costs actually incurred by Westlake in providing these services to us. We will also reimburse Westlake for any direct charges incurred on our behalf; and

 

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Approximately $3.0 million of additional costs of being a separate publicly traded limited partnership, which includes costs associated with annual and quarterly reports to unitholders, financial statement audit, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees and independent director compensation.

Capital Expenditures

We maintain an ongoing program of continually investing in our business. Our expenditures include ongoing expenditures required to maintain current capacity as well as expansion projects that increase capacity or allow us to operate more efficiently. We estimate that total capital expenditures for OpCo for the twelve months ending June 30, 2015 will be $208.9 million, compared to $223.1 million and $209.4 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively, on a pro forma basis. Our estimate is based on the following assumptions:

 

   

Maintenance Capital Expenditures. We estimate total maintenance capital expenditures to be $68.7 million for the twelve months ending June 30, 2015 (excluding any cash reserves for future turnaround expenses as described below). This compares to $40.5 million and $44.1 million for maintenance capital expenditures for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively, on a pro forma basis. We estimate this increase, for both periods, will be due to maintenance projects being performed ahead of a turnaround and a major expansion project at Lake Charles Olefins.

 

   

Expansion Capital Expenditures. We estimate expansion capital expenditures to be $140.2 million for the twelve months ending June 30, 2015, as compared to $182.6 million and $165.3 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively. The expansion capital expenditures during the 12-months ending June 30, 2015 represent expenditures for the Lake Charles Olefins Petro 1 expansion, which we expect will be completed in late 2015 or early 2016. We intend to finance these expansion capital expenditures with borrowings of $140.2 million by OpCo from Westlake.

Turnaround

As part of our ongoing activities to maintain current capacity, the ethylene production facilities periodically undergo planned major maintenance activities, also known as turnarounds. We intend to reserve a portion of our annual sales to fund these costs as they are incurred. We estimate that turnaround reserves will be $29.3 million for the twelve months ending June 30, 2015. This compares to a turnaround reserve of $29.0 million and $30.5 million for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively, on a pro forma basis.

For accounting purposes, we defer turnaround costs and recognize those costs as an expense over the estimated useful life of those capital expenditures, typically until the next expected turnaround project. For the year ended December 31, 2013, we deferred costs of $59.1 million in connection with a turnaround at Petro 2. We did not defer any turnaround costs for the twelve months ended March 31, 2014. For the twelve months ending June 30, 2015, we expect to defer costs of $9.1 million associated with a turnaround at Petro 1.

Depreciation Expense

We estimate that OpCo’s depreciation will be approximately $80.4 million for the twelve months ending June 30, 2015, as compared to pro forma depreciation of approximately $70.3 million for both the year ended December 31, 2013 and the twelve months ended March 31, 2014. Estimated depreciation expense reflects management’s estimates, which are based on consistent average depreciable asset lives and depreciation methodologies. Depreciation is expected to increase during the forecast period primarily due to depreciation related to capital expansion projects and maintenance capital expenditures related to our ethylene production facilities.

 

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Financing

We estimate that net interest and other financial costs of OpCo will be approximately $11.9 million for the twelve months ending June 30, 2015, as compared to $2.5 million and $3.5 million pro forma net interest and other financial costs for the year ended December 31, 2013 and the twelve months ended March 31, 2014, respectively. This increase, for both periods, is primarily due to a higher average debt balance during the forecast period related to the financing of forecast capital expenditures. Our forecasted net interest and other financial costs for the twelve months ending June 30, 2015 are based on interest expense of $12.2 million calculated on an assumed average debt level of $301.2 million comprised of funds drawn on OpCo’s $600.0 million revolving intercompany line of credit from Westlake to fund expansion capital expenditures, offset by $0.3 million in interest income on the approximately $65.5 million turnaround reserve to fund future estimated capital expenditures of OpCo.

Regulatory, Industry and Economic Factors

Our forecast of adjusted current earnings for the twelve months ending June 30, 2015 is based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

Westlake will not default under either the Ethylene Sales Agreement or the Feedstock Supply Agreement or reduce, suspend or terminate its obligations, nor will any events occur that would be deemed a force majeure event, under such agreements;

 

   

there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the industries in which we operate that will be materially adverse to our business;

 

   

there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets or Westlake’s downstream facilities;

 

   

there will not be a shortage of skilled labor; and

 

   

there will not be any material adverse changes in the petrochemicals industry or overall economic conditions.

 

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HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

General

Cash Distribution Policy

Our partnership agreement provides that our general partner will make a determination as to whether to make a distribution, but our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner will adopt a cash distribution policy to be effective as of the closing of this offering that will set forth our general partner’s intention with respect to the distributions to be made to unitholders. Pursuant to our cash distribution policy, within 60 days after the end of each quarter, beginning with the quarter ending September 30, 2014, we intend to make a minimum quarterly distribution of $0.2750 per unit, or $1.10 on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will prorate the distribution for the period after the closing of the offering through September 30, 2014.

The board of directors of our general partner may change the foregoing distribution policy at any time and from time to time, and even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner.

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Operating Surplus and Capital Surplus

General

Any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Distributions from operating surplus are made differently than cash distributions we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the incentive distribution rights would generally not participate in any capital surplus distributions. Any distribution of capital surplus would result in a reduction of the minimum quarterly distribution and target distribution levels and, if we reduce the minimum quarterly distribution to zero and eliminate any unpaid arrearages, thereafter capital surplus would be distributed as if it were operating surplus and the incentive distribution rights would thereafter be entitled to participate in such distributions. Please see “—Distributions From Capital Surplus.” 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.

Operating Surplus

We define operating surplus as:

 

   

$28.0 million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below) and provided that cash receipts from the termination of any hedge contract prior to its stipulated settlement or termination date will be included in equal quarterly installments over the remaining scheduled life of such hedge contract had it not been terminated; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period that commences when we enter into a binding obligation for

 

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the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above, in each case, in respect of the period that commences when we enter into a binding obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred; less

 

   

any cash loss realized on disposition of an investment capital expenditure.

Disbursements made, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period but on or before the date on which cash or cash equivalents will be distributed, with respect to such period, shall be deemed to have been made, received, established, increased or reduced, for purposes of determining operating surplus, within such period if our general partner so determines. Operating surplus is not limited to cash generated by our operations. For example, it includes a basket of $28.0 million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the 12-month period following the borrowing, it will be deducted from operating surplus at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deduction.

We define operating expenditures in our partnership agreement, and it generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under hedge contracts (provided that (i) with respect to amounts paid in connection with the initial purchase of a hedge contract, such amounts will be amortized over the life of the applicable hedge contract and (ii) payments made in connection with the termination of any hedge contract prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract), officer and director compensation, repayment of working capital borrowings, interest on indebtedness and maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

 

   

repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the definition of operating surplus above when such repayment actually occurs;

 

   

payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and premium on indebtedness, other than working capital borrowings;

 

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expansion capital expenditures;

 

   

investment capital expenditures;

 

   

payment of transaction expenses relating to interim capital transactions;

 

   

distributions to our partners (including distributions in respect of our incentive distribution rights);

 

   

repurchases of equity interests except to fund obligations under employee benefit plans; or

 

   

any other expenditures or payments using the proceeds of this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any cash distributed in excess of our operating surplus. Accordingly, capital surplus would generally be generated only by the following (which we refer to as “interim capital transactions”):

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity interests;

 

   

sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets; and

 

   

capital contributions received.

Characterization of Cash Distributions

Our partnership agreement provides that we treat all cash distributed as coming from operating surplus until the sum of all cash distributed since the closing of this offering (other than any distributions of proceeds of this offering) equals the operating surplus from the closing of this offering. Our partnership agreement provides that we treat any amount distributed in excess of operating surplus, regardless of its source, as distributions of capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not. Maintenance capital expenditures are those cash expenditures made to maintain our long-term operating capacity or net income. Examples of maintenance capital expenditures include expenditures associated with the replacement of equipment, to the extent such expenditures are made to maintain our long-term operating capacity or net income. Cash expenditures made solely for investment purposes will not be considered maintenance capital expenditures.

Expansion capital expenditures are those cash expenditures, including transaction expenses, made to increase our operating capacity or net income over the long term. Examples of expansion capital expenditures include the acquisition of equipment, development of a new facility or the expansion of an existing facility, to the extent such expenditures are expected to expand our long-term operating capacity or net income. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of such acquisition, construction, development or expansion in respect of the period that commences when we enter into a binding obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or abandoned. Expenditures made solely for investment purposes will not be considered expansion capital expenditures.

Investment capital expenditures are those capital expenditures, including transaction expenses, that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures

 

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will largely consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other cash expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of an asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity or net income, but which are not expected to expand, for more than the short term, our operating capacity or net income.

As described above, neither investment capital expenditures nor expansion capital expenditures are operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of an acquisition, development or expansion in respect of a period that begins when we enter into a binding obligation for an acquisition, construction, development or expansion and ends on the earlier to occur of the date on which such acquisition, construction, development or expansion commences commercial service and the date that it is abandoned or disposed of, such interest payments do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Cash expenditures that are made in part for maintenance capital purposes, investment capital purposes or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we describe below), the common units will have the right to receive distributions from operating surplus each quarter in an amount equal to $0.2750 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution from operating surplus plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore,