Lewandowski: MLP captures
tax benefits and frees capital
From a supply and demand standpoint, there will be no fundamental change to the US ethylene system as a result of Westlake Chemical Corp.'s move to carve out its ethylene assets into a Master Limited Partnership (MLP). This decision will not impact the company operationally in terms of production, but instead, is a financial restructure designed to leverage existing tax benefits. This, in turn, accomplishes some key objectives for Westlake, including improved investment returns for stockholders, and the flexibility to pursue additional growth opportunities by freeing capital for investment.
Olefins production has recently been classified as a qualifying industry under Internal Revenue Service codes for MLP formation. A financial structure of this sort allows access to investors, attracted by the tremendous total return potential (i.e. return on investment via capital gains and cash distributions). Two key ways to access capital is through the retained earnings and new unit offerings to the market, which places a premium on MLPs versus conventional company financial structures.
IHS Chemical believes this decision makes sense for Westlake and expects the formation of the Westlake Chemical Partners LP to be a “first step” into an organic and acquisition-based growth strategy. It also enables the Westlake Chemical Corp.'s shareholders to divest its ethylene business and reap their rewards during a window of time with excellent earnings potential due to the shale gas revolution. The positive market effect of this cash-out timing is clearly evident from the rise in stock value of around 20 percent after yesterday's announcement.
Steve Lewandowski is senior director, global olefins, for IHS Chemical. He can be reached at Steve.Lewandowski@ihs.com