Westlake Chemical Partners LP (WLKP) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded today, May 4, 2015. I would now like to turn the call over to today's host, Mr. Dave 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 first-quarter 2015 conference call. I'm 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 will begin with Albert, who will open with a few comments regarding Westlake Chemical Partners' performance in the first quarter and a current outlook on performance and opportunities. Steve will then provide a more detailed look at our financial and operating results. And finally, Albert will add a few concluding comments and we will open up the call to questions.

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. And an ethylene production facility located in Calvert City, Kentucky, and an ethylene pipeline that runs from Mont Belvieu, Texas to the 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 certainties.

Actual results could differ materially based upon factors including operating difficulties; the volume of ethylene we are able to sell; the price at which we are able to sell ethylene; changes in the price and availability of electricity; changes in prevailing economic conditions; actions of third parties; unanticipated ground, grade, or water conditions; inclement or hazardous weather conditions, including flooding and the physical impacts of climate change.

Environmental hazards; industrial accidents; changes in laws and regulations; inability to acquire or maintain necessary permits; inability to obtain necessary production equipment or replacement parts; technical difficulties or failures; labor disputes, delays of raw materials; difficulty collecting receivables; inability of our customers to take delivery; changes in price and ability of transportation; fires, explosions, and other accidents; or our ability to borrow funds and access capital markets and other risk factors.

This morning, Westlake Partners issued a press release with details of our first-quarter financial and operating results along with a description of our first dropdown transaction with OpCo. This document is available in the press release section of our website at www.wlkpartners.com.

A replay of today's call will be available beginning two hours after completion of this call until 12:00 AM Eastern time on May 11, 2015. The replay may be accessed by dialing the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 24773677.

Please note that information reported on this call speaks only as of today, May 4, 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 advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our web page at www.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 first-quarter results.

In this morning's press release, we reported consolidated net income including OpCo's earnings of $88 million for the first quarter of 2015. We owned 10.6% of OpCo during the first quarter. Therefore, the net income attributable to our limited partners was $9 million.

OpCo's ethylene units continued to perform well in the first quarter, delivering record production. We were pleased to announce an increase in distributions to our unit holders with respect to the first quarter.

This 2.9% increase is the first increase in distributions to our unit holders since our initial public offering in August 2014. And it's consistent with our targeted annualized low double-digit growth in distributions. I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the first quarter.

Thank you, Albert, and good morning, everyone.

In this morning's press release, we reported consolidated net income of $88 million on sales of $258 million for the first quarter of 2015. Net income attributable to the Limited Partners which was derived from our 10.6% ownership of OpCo was $9 million, or $0.31 per limited partner unit. We also reported MLP distributable cash flow of $9 million for the quarter.

The benefit from a long-term ethylene sales agreement with our sponsor Westlake Chemical is a stable fee-based cash flow which is insulated from oil and ethylene price volatility. This contract represents 95% of our ethylene sales and protects the Partnership's cash flows from the risk traditionally associated with the chemical industry. This ethylene contract, which is structured to generate a cash margin of $0.10 per pound of ethylene along with the take or pay provisions, incentivize us to continue to look for opportunities to increase capacity and operating rate.

As Albert mentioned, we achieved record production in the first quarter, which drove growth in MLP distributable cash flow. Along with previously announced expansion of our Petro 1 facility targeted for completion in the first half of 2016 that will add an estimated 250 million pounds per year of ethylene production capacity, we continually look to evaluate other opportunities such as capacity expansions in OpCo's ethylene production facilities and acquisitions of other qualified assets from third parties.

As announced last week, we have completed our first dropdown transaction where we purchased an additional 2.7% interest in OpCo for $135 million. The purchase was funded by a revolving credit facility that was established between the Partnership and an affiliate of Westlake Chemical. This transaction is an important step in our plan to provide for consistent long-term distribution growth for the Partnership.

On August 29, we declared a quarterly distribution to unit holders of $0.2829 per unit. This increase of $0.0079 per unit represents a 2.9% increase from the prior quarter and sets us on the path for delivering consistent quarterly increases targeting an annualized low double-digit growth rate. The coverage ratio for the first quarter 2015 is 1.17 with respect to MLP distributable cash flow.

At the end of the first quarter, we had a consolidated cash balance of $145 million of which $143 million was with OpCo and $2 million was held at the partnership level. Long-term debt was $258 million, all of which was at the OpCo level.

As discussed earlier, in conjunction with the dropdown completed in April, the partnership entered a three-year $300 million revolving credit facility with an affiliate of our parent, Westlake Chemical. This facility provides the liquidity necessary to fund the recent completed drop-down and may be used to fund future acquisitions and for general corporate purposes. Please see the schedules attached on the back of the earnings release for the definition of MLP distributable cash flow and for reconciliations to the full quarter's performance.

Now I'd like to turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. Our first-quarter 2015 results continue to demonstrate our stable fee-based cash flow generated by our fixed margin ethylene sales contract with Westlake Chemical. These stable cash flows provide a strong foundation for growth. The acquisition of additional ownership in shares of OpCo by our Partners in April provides us a platform to continue to deliver on our targeted annualized low double-digit growth in distributions.

Looking forward, we continue to work toward our Petro 1 ethylene expansion at our Lake Charles site that is expected to add 250 million pounds a year of ethylene capacity. This expansion is planned for completion in the first half of 2016.

Thank you very much for listening to our first-quarter earnings call this morning. Now I will turn the call back over to Dave Hansen.

Thank you, Albert. Ladies and gentlemen, before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available starting two 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)

Kevin McCarthy, Bank of America Merrill Lynch.

Yes, good morning. Albert, would you comment on your current view of the M&A outlook and whether or not you're any more confident or less confident in acquisition potential relative to, say, last quarter?

I don't think the environment has changed much. For M&A, depends on both parties to reach an agreement, and opportunity is out there, but two parties have to come to agreement. But I don't think between first quarter this year and last quarter last year, things have changed much.

Okay. And with regard to Westlake Chemicals' dispute with Eastman Chemical on the pipeline, would you provide an update as to the status of that and what's been resolved and what has not been resolved?

Yes, Kevin, as I say for very briefly, there were two topics. One was a [tariff-ish] one, one was directional flow.

Of course, in the case of the tariff, I think that we took the view that the tariff is something that just needs to be market-based. Directional flow was an issue that I think was resolved where we believe that we can wait to see if Eastman wants to move product south down the pipeline, and we stand ready and waiting to see if they want to move product down the pipeline.

Okay. And then the last one for me or maybe two pieces, Steve, could you provide an update on maintenance CapEx and contribution to turnaround activity from a WLKP perspective?

Clearly from a funding of those events, we seeded at IPO the capital that was necessary to be able to fund those turnarounds when those occur. And on an ongoing monthly basis, there is a continuance of a seeding of that capital necessary to fund those.

So therefore that's why I've made reference to the cash balances that are sitting on OpCo. As you can see, the great majority, $143 million, sits at OpCo. So therefore we're well positioned to fund the turnaround events when those occur, and as we made note earlier, we've got one coming in 2016.

Great. Thank you very much.

You're welcome.

Brian Maguire, Goldman Sachs.

Good morning, guys.

Good morning.

I think the IRS had had a moratorium on issuing new PLRs for a while. I think they've come out of it. There was some chatter when they did come out that they might look to change some of the classifications of qualifying again for some things that have recently been put into MLPs. I'm just wondering if you're hearing anything along those lines and if there's any risk to that impact in WLKP as far as you see it.

Brian, thank you for the question and the opportunity to provide some clarity here. We don't see based on conversations we've had with our council and they with Service, we don't see any risk associated with our private letter ruling as it relates to the comments from the Service.

So we remain very comfortable and very pleased that the PLR that we have will continue to provide the structure that's in place today. And we don't, based on conversations, don't see any risks associated with that.

Okay. That's great news. And by your calculations, was the drop last week enough to support your goal for low double-digit distribution growth this year? Or should we expect there to be a second drop this year or some other action need to be taken to hit that goal?

We believe based on the numbers that we've put in the releases, and you can see quite clearly that we're on a path to provide that annualized low double-digit growth rate that Albert made reference to. We certainly want to continue to have you think in terms of that very much the message that we want to continue to deliver, and the actions we took last week we think deliver on that promise.

Okay. And then just hoping to understand the thinking behind going to a quarterly distribution increase as opposed to a once-a-year thing. How should we be thinking about that or read into that?

I think this is fairly common, Brian. When you think in terms of wanting to reward investors today and investors that would continue to invest, we want to make sure there's an ample return and an expectation so that they can see the step-by-step growth that we're delivering to that growth in quarterly distribution.

Okay. Thanks very much.

You're welcome.

At this time the Q&A session has now ended. I'd like to hand the conference back over for closing remarks.

Thank you very much. We appreciate your participation in our call today. We hope that you will join us again for our next conference call to discuss the second-quarter results. Thank you very much and have a wonderful day.

Ladies and gentlemen, thank you for participating in today's Westlake Chemical Partners first-quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has concluded and may be accessed until 12 AM Eastern time on May 11, 2015.

The replay can be accessed by dialing the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 24773677. You may all disconnect and have a wonderful day.