Westlake Chemical Partners LP (WLKP) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners Second Quarter 2015 Earnings Conference Call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, August 4, 2015. I would now like to turn the call over to today's host, 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 Second 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 second 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 then open the call up for questions.

Today, 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 natural gas liquid processing facilities located in Lake Charles, Louisiana, a natural gas liquids processing 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 uncertainties.

Actual results could differ materially based upon many factors including operating difficulties, the volume of ethylene that we are able to sell, the price at which we are able to sell ethylene, changes in the prevailing economic conditions, actual and proposed governmental regulatory actions, competitive products and pricing pressures, our ability to borrow funds and access capital markets, and other risk factors discussed in our SEC filings.

This morning, Westlake Partners issued a press release with details of our second quarter financial and operating results. This document is available in the Press Release section of our web page at 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 August 15, 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 82625222.

Please note that information reported on this call speaks only as of today, August 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 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 second quarter results. In this morning's press release, we reported consolidated net income including OpCo's earnings of $87 million for the second quarter of 2015.

Westlake Partners net income was $10 million. The dropdown that was effective April 1 increased the partnership's ownership of OpCo to 13.3% and provided growth in net income and distributable cash flow in the quarter. We are very pleased with OpCo as the ethylene plants performed well and operated above industry operating rates in the quarter. The sales agreement with Westlake continues to provide steady and predictable cash flows, which were designed to allow us to drive long-term value for all of our unitholders.

We're pleased to announce an increase in distributions to our unitholders with respect to the second quarter on July 29. This 2.9% increase in distributions is the second increase in distributions to our unitholders since our initial public offering in August of 2014 and is consistent with our targeted annual low-double digit growth in distributions. Shortly after our first quarter earnings call in May, the IRS released proposed regulations governing qualified income for master limited partnerships.

These proposed regulations, if finalized in their proposed form, would have the effect of rescinding the Private Letter Ruling we received from the IRS in 2013, leaving us with a 10-year transition period in which our income will be qualified. We believe that the IRS interpretation of the law when issuing our Private Letter Ruling was and still is correct. As announced last week, we filed comments with IRS and the Department of Treasury on their proposed regulations outlining our view of the tax statute and that our activities clearly are within the plain reading of the statute.

We will continue to discuss the proposed regulations with the IRS and Treasury and I'm looking forward to working with the IRS to develop guidelines of qualified income that are consistent with the tax statute and that are in the best interest of all stakeholders. 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. Steve?

Thank you, Albert and good morning everyone. In this morning's press release, we reported consolidated net income including OpCo's earnings of $87 million on sales of $252 million for the second quarter of 2015. Westlake Partners net income was $10 million or $0.39 per limited partner unit. We also reported MLP distributable cash flow of $9 million for the quarter.

Net income attributable to the limited partners represents 23% increase when compared to the first quarter 2015. The increase was primarily driven by the acquisition of an additional 2.7% interest in OpCo in the beginning of the second quarter. For the first six months, OpCo spent $96 million in capital expenditures and continue to work toward completing the expansion of Petro 1, which is expected to be completed in the first half of 2016.

The benefit from the 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 margin volatility traditionally associated with the ethylene business. This ethylene contract, which is structured to generate a 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 rates.

Along with the previously announced expansion of our Petro 1 facility that will add an estimated 250 million pounds per year of ethylene capacity, we continue to evaluate other expansion opportunities as well as acquisitions of other qualified assets from third parties. On July 29, we declared a quarterly distribution to unitholders of $0.291 per unit. This increase of $0.0081 per unit represents a 22.9% increase from the prior quarter and sets us on the path to deliver consistent quarterly increases targeting an annualized low-double digit growth rate.

Coverage ratio for the second quarter of 2015 is 1.17 times with respect to MLP distributable cash flow. At the end of the second quarter, we had a consolidated cash balance of $137 million of which $134 million was held at OpCo and $3 million at the partnership level. Long-term debt was $281 million of which $146 million was at the OpCo level and $135 million was at the partnership. I'd like to turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. The stable fee-based cash flow generated by our fixed margin ethylene sales contract with Westlake Chemical forms the foundation for us to deliver long-term value to our unitholders. This enables us to successfully pursue dropdown transactions, organic growth, and third-party acquisition opportunities.

Looking forward, we continue to work towards our Petro 1 ethylene expansion at our Lake Charles site and expects to add 250 million pounds of ethylene capacity by the first half of 2016. Thank you very much for listening to our second quarter earnings call this morning. Now I'll turn the call back over to Dave Hansen. Dave?

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting two hours after we conclude the call. We'll provide that number again to you at the end of the call. Operator, we're now prepared to take any questions that we may have.

(Operator Instructions) Brian Maguire, Goldman Sachs.

Hey, Albert and Steve. I'm just hoping to get some update and thoughts on the IRS position, I realize it's still a very fluid situation, but you have any kind of initial thoughts on what a plan B might look like in case they don't come around and change their mind on the proposed ruling is going to affect. Would you be looking to accelerate some of the dropdown opportunities that you've got or renegotiate some of the fixed fee arrangements. Just what are the things that are on the table and that how do you guys see it playing out if we had to go to a plan B?

Well Brian, we naturally are looking at a number of options along those paths and potentially we'll evaluate those as we go through this comment period and assess the dialog and the comments that we get back from IRS and Treasury, but I think you've outlined some of the things that we're looking at and we'll continue to look at those and assess the appropriateness of those in the context of the discussions that we have.

Okay, great. And then as a follow-on, would it be safe to assume that you'll put any kind of additional dropdowns or acquisitions on hold until we get a final IRS ruling given [that you are] bound to impact the valuations on these things?

Brian, as you know from these proposed regs, we have a 10-year transition period and so we continue to believe that as long as the arbitrage remains and there is good arbitrage today that it makes continued good value to pursue the growth that we've [mitigated well into the street]. So, no we would continue to make those dropdowns occur so long as there is good arbitrage than there is today.

Kenneth Hackel, CT Capital.

Yes, I had a B question as well and that is the possible plan B reversal [of the view?].

We'll continue to assess a variety of opportunities and a variety of paths depending on the discussions that we have and the viability of those choices. So as we go through that process, I think the IRS and Treasury will make the process as transparent as possible and so certainly as we go through this process and assess the opportunities, we'll do that and as best that we can, we'll continue to communicate to the unitholders about those choices.

Thank you for participating in today's Westlake Chemical Partners Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning two hours after the call has ended and maybe accessed until 12:00 AM Eastern Time on August 15, 2015. The replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 82625222.