Westlake Chemical Partners LP (WLKP) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, February 24, 2015. I would now like to turn the call over to today's host, David Hansen, Westlake Chemical Partners' Senior Vice President of Administration. Sir, you may begin.

Thank you very much. Good morning, everyone, and welcome to the Westlake Chemical Partners fourth-quarter 2014 conference call. I am joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and Chief Financial Officer; and other members of our Management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake Chemical Partners' performance in the fourth quarter and a current outlook on our performance and opportunities. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we will open the call up to questions.

Unless otherwise noted, all numbers that are referenced today for post initial public offering period, or our post IPO period, will be for the period following the close of our IPO that occurred on August 4 through December 31. At times, we may refer to ourselves as Westlake Partners or the Partnership. References to Westlake Chemical refer to our parent Company, Westlake Chemical Corporation, and references to OpCo refer to Westlake Chemical OpCo LP, whose assets consist of two ethylene production facilities located in Lake Charles, Louisiana; an ethylene production facility located in Calvert City, Kentucky; and ethylene pipeline that runs from Mont Belvieu, Texas, to Longview, Texas, chemical sites.

Today, Management is going to discuss certain topics that will contain forward-looking information that is based on Management's beliefs, as well as assumptions made by and information currently available to Management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based upon factors, including the cyclical nature of the chemical industry; availability, cost, and volatility of raw materials, energy, and utilities; governmental regulatory actions and political unrest; global economic conditions; industry operating rates; the supply/demand balance for Westlake Partners products; competitive products and pricing pressures; access to capital markets; technological development; and other risk factors.

This morning Westlake Partners issued a press release with details of our fourth-quarter financial and operating results. This document is available in the press release of our webpage at wlkpartners.com. A replay of today's call will be available beginning four hours after completion of this call until 11:59 PM eastern time on March 3, 2015. The replay may be accessed by dialing the following numbers. Domestic callers should dial 888-286-8010. International callers may access the replay at 617-801-6888. The access code for both numbers is 17902631. Please note that information reported on this call speaks only as of today, February 24, 2015, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would finally advice you this conference call is being broadcast live through an internet webcast system that can be accessed at our webpage at wlkpartners.com. Now I'd like to turn the call over to Albert Chao. Albert?

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our fourth-quarter results. In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $94 million for the fourth quarter of 2014. We own 10.6% of OpCo and so the net income attributable to the Limited Partners was $9 million.

Since our IPO in August 2014, this quarter represents our first full quarter of operations. Our ethylene units operated well during the quarter and our average operating rates were higher than industry, as reported by industry consultants, resulting strong and stable cash flow for the quarter. I would now like to turn the call over to Steve to provide more detail on the financial and operating results for the fourth quarter.

Thank you, Albert, and good morning, everyone. In this morning's press release, we reported net income attributable to the Limited Partners for the fourth quarter of 2014 of $9 million, or $0.32 per limited partner unit. We also reported MLP distributable cash flow of $9 million for our first full quarter of operations.

The long-term ethylene sales agreement between OpCo and our parent, Westlake Chemical, provides a stable, fee-based cash flow, which is insulated from oil and ethylene price volatility risk, that represents 95% of our ethylene sales. This sales agreement is set at a cash margin of $0.10 per pound of ethylene, passing through all other cost. This ethylene contract structure is very important, as it provides us a stable, fee-based cash flow stream, and is designed to provide us the means to grow distribution while maintaining the conservative coverage ratio. We have substantial liquidity and a conservative leverage structure with the financial and operating backing of our investment grade-rated parent, Westlake Chemical.

For the 2014 post-IPO period, consolidated net income, including OpCo, was $148 million. Net income attributable to the Partnership was $14 million, or $0.50 per limited partner unit, and MLP distributable cash flow was $14 million. On January 30, we declared a quarterly distribution to unit holders of $0.275 per unit representing a coverage ratio of 1.15 times coverage with respect to our MLP distributable cash flow for the fourth quarter of 2014, in excess of our targeted annual average coverage ratio of 1.1 times, which we have previously guided.

At the end of the fourth quarter, we had a consolidated cash balance of $134 million, of which $132 million was at OpCo and $2 million was at the Partnership level. Long-term debt was $228 million, all of which was at the OpCo level, leaving us debt-free. OpCo is well-capitalized, with a $600 million line of credit to fund growth opportunities, and we'll use a portion of this line to fund the expansion offer our Petro 1 ethylene unit in Lake Charles that we are planning in the first half of 2016.

Please see the schedules attached to the back of the earnings release for the definition of MLP distributable cash flow and for a reconciliation to the full year's performance, which combines results of Westlake Chemical Partners with those of its predecessor. Now I'd like to turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. We had a successful fourth quarter, which represents our first full quarter of operations. Our fourth-quarter results demonstrate a stable business, supported by fixed-margin ethylene sales contracts with Westlake Chemical that is not affected by direct ethylene and oil price exposure. This should result in stable cash flows and a strong foundation for growth.

The take-or-pay fixed-margin arrangement insulates 95% of our ethylene sales volume, and hence, the majority of our cash flow from the volatility in ethylene prices and feedstock costs. Looking forward, we have four levers to grow MLP distributable cash flow. First, through periodic drop-downs of the remaining approximately 90% of OpCo's interests into Westlake Partners.

Second, through organic growth opportunities, such as our Petro 1 ethylene expansion at our Lake Charles site that we have planned for the first half of 2016. Third, by negotiating a higher fixed margin in our ethylene contract with Westlake Chemical. Fourth, via external acquisition opportunities, either at Westlake Partners or jointly with Westlake Chemical. The stability it of our cash flows, along with the four levers of growing MLP distributable cash flow, provides us the opportunity to generate long-term value growth to our unit holders.

We continue to assess opportunities to build upon our growth strategies and are moving forward with our plans for the expansion of our Petro 1 ethylene unit in Lake Charles that's planned for the first half of 2016. This project will expand our ethylene capacity by approximately 250 million pounds annually, and through our fixed-margin sales arrangement, this project will be immediately accretive to our unit holders. Thank you very much for listening to our fourth-quarter earnings call this morning. Now I'll turn the call back over to Dave Hansen.

Thank you very much, Albert. Ladies and gentlemen, before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting four hours after we conclude the call. We will provide that number again at the end of the call. Operator, we're now prepared to take questions.

(Operator Instructions)

Your first question comes from the line of Brian Maguire of Goldman Sachs. Please go ahead.

Hi, good morning.

Good morning.

Albert, I was hoping you could provide some updated thoughts on the timing for the first drop-down from the parent. Buying an additional stake in OpCo seems like the most obvious way to grow the distribution in the near term. Just any thoughts on the timing and size of that first drop-down?

Certainly. At our IPO, we said that we planned to grow our distributable cash flow by drop-downs [and other] ways within a year of IPO, so this is our plan and we're working towards that.

Okay and any restrictions on you that would prevent you from doing that now? Is there any window that you need to fit it into besides the one-year period you just described?

Brian, this is Steve. No, the answer is that we continue to march forward as we've given guidance that we would do that drop well within the first year of the IPO, and that certainly is still very much our intent.

Okay. Then do you have an outlook for maintenance and growth CapEx for 2015?

Remember, those costs are being funded by OpCo and we have a mechanism under our contract mechanic where those costs are reimbursed on a monthly basis, so maintenance costs and all those all flow through completely. So this again is going to be a very stable stream, because all those maintenance costs and such completely flow through on a monthly basis back to Westlake Chemical. Of course, as I gave guidance, the expansion capital has a line of credit from Westlake Chemical to OpCo that we use to fund that expansion-related capital.

Okay, thanks very much.

You're welcome.

Thank you for your question. Your next question comes from the line of Robert Balsamo from UBS. Please proceed.

Hey, guys. Thanks for taking my call. Just a quick question. Albert, you just mentioned potentially increased margin on the contracted fee between Westlake Chemical and the Partnership? I don't believe you've addressed that in the past. Is that something new that you guys are contemplating? Maybe you can talk about the -- Albert, the situation where that would--?

This is one of the four levers that we can grow distributable cash flow and drop down organic expansion, like we're doing with the Petro 1 expansion. Suddenly, we can increase -- currently there's a $0.10 margin. We can increase that margin, and lastly it's through acquisition. So there are four levers we can use.

Okay. Is there a certain environment that you would particularly choose -- that would drive you to increase that margin, just to drive distribution growth or if the ethylene margins got narrower on the 5% that's not contracted, or is there a certain benchmark where you keep an eye on that might be a driver of that decision?

Well certainly the first three, namely the drop-downs, the increased margin, the expansion of within our control. The fourth lever, acquisition, depending on the sell-side opportunity, as well. But those three, we can do it as conditions warrant, so such as our expansion that we're [doing now].

Okay, great, thank you.

You're welcome.

Thank you for your question. There are no questions waiting.

(Operator Instructions)

The next question comes from the line of John Roberts from UBS. Please proceed.

Good morning, guys.

Good morning, John.

Wanted to follow-up as well on that potential to increase the $0.10 a pound margin. Why would a public shareholder of the parent company want to see that happen? Most of the income comes back into the parent company so I would assume it's neutral from that perspective, but more income would flow out to the partnership owner, so how do you trade that off?

Certainly, if the parent or OpCo is giving a value to MLP, MLP has to pay for it some way.

Right and how would that be?

It would be negotiated between the [conflict] committee at MLP and with the parent.

Would it be in ownership interest or a one-time cash adjustment or how would you envision the transaction occurring?

John, this is Steve. The way that would work would be an amendment to existing ethylene agreement, if that were ever negotiated, and so it would be amendment to the ethylene agreement, which is where the current margin sits.

But you'd have to adjust something in the agreement to trade off against the higher margin, right?

Yes, of course. What would happen, it would be a negotiation, as Albert outlined between the parent and the conflicts committee and they would then exchange value for that amendment to the contract.

Okay and you would envision it all happening within the context of the contract? Some other term on the contract would change in adjustment for that?

That's part of the discussion, so it would be an exchange of value and that value can be done lots of different ways. It could be, say, units, it could be other terms and conditions within the contract.

Okay.

It could be debt.

It can be a lot of parameters. It's just a negotiation of how you exchange value between two parties.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of David Grumhaus from Duff & Phelps. Please proceed.

Good morning, guys. Two questions for you. First, can you talk a little bit about what you're seeing and what your outlook is for the margins on the 5% of third-party sales? And then secondly, would love to get your take on what the external acquisition market might look like, given some of the upheaval we've had in commodity prices.

Yes, certainly the margins in the prices for ethylene has dropped in the recent months, but as oil prices firmed up potentially, the prices could move up also, so it's quite volatile, but it's only 5% of the revenue, of the volume, so it is not a major impact on that.

And in terms of opportunities as we see in the marketplace, we continue to assess growth opportunities. As Albert outlined, there are four levers of growth and acquisition opportunities is one of those four levers, and we continue to assess those opportunities on an ongoing regular basis.

Any sense of whether you're seeing more or less, given some of the changes in the commodity prices?

It's probably too early to gauge at this stage, but we'll continue to watch. Our view is we've got three of those four levers within the ability to work with partners in Westlake Chemical, our sponsor in that negotiation process, to achieve that growth in distributable cash flow, so I don't feel concerned about having to manage a growth opportunity through acquisitions, because there are so many other ways in which we can grow that distributable cash flow without those occurring.

That makes sense. Thanks.

You're welcome.

Thank you for your question. At this time the question-and-answer session has now ended. Are there any closing remarks?

We would like to thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss the first-quarter 2015 results. Have a wonderful day.

Thank you for participating in today's Westlake Chemical Partners third-quarter earnings conference call. As a reminder, this call will be available for replay beginning four hours after the call has ended. You may access until 11:59 PM Eastern Time on March 3, 2015. The replay can be accessed by calling following numbers. Domestic callers should dial 888-286-8010. International callers may access the replay at 617-801-6888. The access code for both numbers is 17902631.