Westlake Chemical Partners LP (WLKP) 2016 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 2016 earnings conference call.

(Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today, May 3, 2016.

I would now like to turn the call over to today's host, Ben Ederington, Westlake Chemical Partners' Vice President and Chief Administrative Officer.

Sir, you may begin.

Thank you.

Good morning, everyone, and welcome to the Westlake Chemical Partners first-quarter 2016 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 will begin with Albert, who will open with a few comments regarding Wesley Chemical Partners' performance in the first quarter, as well as 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 then we will open the call up to questions.

During this call, we 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, a subsidiary of Westlake Chemical and the Partnership, which owns certain olefin assets.

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 first-quarter financial and operating results.

This document is available in the press release section of our website page at wlkpartners.com.

A replay of today's call will be available beginning two hours after completion of this call until 11:59 PM Eastern Time on May 10, 2016.

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 90231034.

Please note that information reported on this call speaks only as of today, May 3, 2016; 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 webpage at wlkpartners.com.

Now I would like to turn the call over to Albert Chao.

Albert?

Thank you, Ben.

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 $103 million for the first quarter of 2016.

Westlake Partners' income was $12 million.

We are very pleased with OpCo's first-quarter performance.

Our results continue to demonstrate the strength and stability of the sales agreement with Westlake Chemical and the efficiency of our operations.

We continue to deliver solid results in the face of challenging energy markets.

In mid-April, we began our $250 million pound ethylene expansion and a turnaround at OpCo's Petro 1 facility in Lake Charles, Louisiana.

We continue to be on schedule, and expect the shutdown to last for approximately 80 days.

On April 27, 2016, we announced an increase in distributions to our unitholders with respect to the first quarter of 2016, and maintain a coverage ratio of 1.11 times the declared distributions.

This 2.9% increase in distributions is the fifth consecutive quarterly increase in distributions to our unitholders since our initial public offering in August 2014, and remains consistent with our targeted annual low-double-digit growth in distributions.

In regards to the IRS proposed regulations governing qualifying income for master limited partnerships, we participated in the IRS hearing on this matter in October 2015, presenting our view that our activities are clearly within the plain reading of the statute.

We believe that the IRS interpretation of the law on issuing our private letter ruling was, and still is, correct.

And we continue to make this point to the IRS and Treasury.

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, Robert, and good morning, everyone.

In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $103 million on consolidated sales of $253 million for the first quarter of 2016.

Westlake Partners' net income was $12 million, or $0.45 per limited partner unit.

We also reported MLP distributable cash flow of $10 million for the first quarter.

First-quarter net income for Westlake Partners increased by $3 million or $0.14 per limited partner unit, when compared to first-quarter 2015.

This increase was due to the additional 2.7% interest in OpCo acquired by the MLP in April 2015.

MLP distributable cash flow of $10 million was $1 million higher than the first quarter of 2015.

This increase was due to the additional 2.7% interest in OpCo acquired by MLP in April 2015, partially offset by increased maintenance capital associated with our ongoing turnaround and expansion project at our Petro 1 facility.

The Partnership's first-quarter 2016 net income of $12 million was $1 million or $0.05 per limited partner unit, higher than fourth-quarter 2015.

MLP distributable cash flow was $500,000 lower than fourth-quarter MLP distributable cash flow.

This decrease in MLP distributable cash flow was a result of increased maintenance, capital expenditures associated with Petro 1.

The benefit from the long-term ethylene sales agreement with our sponsor, Westlake Chemical, is a stable, fee-based cash flow.

This contract represents 95% of our ethylene sales and protects the Partnership's cash flows from margin volatility that can be 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, incentivizes us to continue to look for opportunities to increase capacity and operating rates.

Along with our ongoing 250 million pound ethylene expansion our Petro 1 plant at our Lake Charles facility, we also recently announced an expansion of our Calvert City, Kentucky, facility, which we expect to complete in early 2017.

This expansion, in addition to other incremental capacity increases, will bring our annual ethylene capacity at Calvert City to 730 million pounds.

For the first quarter of 2016, OpCo spent $79 million in capital expenditures as we completed preparations for the expansion of our Petro 1 plant.

As Albert stated, this 250 million pound expansion began in mid-April, and will be completed early in the third quarter.

Due to the turnaround expansion of Petro 1, we expect production for the second quarter of 2016 to be 260 million pounds less than the second quarter of 2015.

We expect the total cost of the expansion at our Petro 1 and Calvert City facilities to be between $355 million and $425 million, and will be funded through the $600 million revolving credit facility established with our sponsor, Westlake Chemical.

As of March 31, OpCo had spent $263 million for these projects.

At the end of the first quarter, we had a consolidated cash balance of $179 million, of which $171 million was held at OpCo, with $8 million at the Partnership level.

Long-term debt was $444 million, of which $309 million was at the OpCo level and $135 million was at the Partnership.

On April 27, 2016, we declared a quarterly distribution to unitholders of $0.3168 per unit.

This increase in distributions of $0.088 per unit represents a 2.9% increase from the fourth quarter of 2015, and continues us down the path to deliver consistent quarterly increases targeting an annualized low-double-digit growth rate.

Coverage ratio for the first quarter of 2016 was 1.11 times with respect to the MLP distributable cash flow.

Now, I would 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 drop-down transactions, organic growth, and third-party acquisition opportunities to increase distributions to our unitholders.

Looking forward, we are in the middle of our Petro 1 expansion at our Lake Charles facility, as well as preparing for upcoming expansion at our Calvert City facility in 2017.

The additional 350 million pounds of ethylene capacity at these two facilities should allow us to continue our targeted low-double-digit growth rate in distributions without a need for drop-down transactions for the next several years.

We will continue to assess future growth opportunities that will allow us to grow MLP distributable cash flow.

Thank you very much for listening to our first-quarter earnings call this morning.

Now, I will turn the call back over to Ben.

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 will provide that number again at the end of the call.

Operator, we will now take questions.

(Operator Instructions).

Miles Barnett, HITE.

This is actually [Emmanuel Black] from HITE.

Thanks for taking the question.

On the IRS process, which remains ongoing, is there any update on the timetable of when you expect to hear?

In our conversations with both the IRS and Treasury, they have not given any definitive timeline.

But I do expect from conversations that we will see something very late summer, and possibly as early as early fall.

So let's think in terms of potentially by Labor Day.

There has been no definitive time frame other than that general sense from them, when we have talked to both Treasury and the IRS.

Got it.

And then, looking at the -- I want to make sure I understand you, Steve.

When you said that you thought you could maintain the low-double-digit distribution growth for several years without doing any drop-downs at all, did I hear that correctly?

That is correct.

As a result of the expansions, both at our Petro 1 unit and our Calvert City unit, we'll have the ability to be able to benefit from the added capacity; and, with that, contract structure that we have that allows us to continue to grow distributions because we have a growing footprint of capacity production.

Understood.

And then, WLK has been active in at least proposing transactions.

AXLL is one that has gotten a lot of attention recently; may or may not happen.

That transaction in particular, or any of those considering, do you see opportunities for additional drop-downs associated with those transactions?

And would you expect to participate in any way, in any transaction, or specifically this one that is proposed?

Well, we continue to look for ways in which to grow the production capacity and grow the distributable cash flow of the Company.

And so without speaking to any particular transaction, that is part of what our corporate development team is constantly in the process of doing.

So while we do not have anything specifically this morning that we can discuss, certainly, as you can imagine, it is an ongoing activity.

Got it.

And then, last question.

It seems like it is hard to get traction with the analyst community and the investment community, given the size, and given that WLKP is so different from other things; in many ways, I think more attractive.

But, it is still different.

Is there any sense that maybe Westlake just decides that this isn't worth the hassle, and take it back in, particularly given the if the valuation is -- would arguably be accretive, or at least not dilutive to do so?

Well, I think your comments about the overhang related to the IRS, and the broader [offering] about the commodity has had a significant impact on all energy-related or connected securities.

And so you have certainly seen that would be [ware in] and index.

And so that I certainly think that as the industry works its way through a lot of these issues, we will certainly see, I think, a more rational market.

But, in the meantime, I think what you have seen here is the Partnership continue to be able to grow its distribution and continue to be on that path.

Great.

Thank you very much.

Kenneth Hackel, CT Capital.

Sorry if I missed the earlier call.

More of a significant -- a theoretical question.

I'm just wondering why you decided to reduce you financial flexibility -- your financial structure and raise your cost of capital -- but by continuing to pursue the Axiall deal, which at a time of economic growth and your end markets headed toward zero.

It is not listed as zero.

You are not only pursuing it, but you're actually raising your offer.

It doesn't make sense from a cost of capital financial flexibility, liquidity profile point of view.

What gives there?

What is your rationale here?

I am not catching on to this.

As you can imagine, this is a call with regard to earnings of Westlake Chemical Partners.

And certainly, I would be happy to have a conversation with you on the Axiall matter or any other matter.

But I don't want to tie up the call for our -- earnings call on this matter.

So I think you have got my contact details are on the Web.

And I will be happy to follow up a discussion with you on any corporate development matter, if you would like to do it another time.

I understand.

I'm sorry I missed the earlier call.

Thank you.

And that concludes our question-and-answer session for today.

I would like to turn the conference back over to Ben Ederington for any closing comments.

Thank you again for participating in today's call.

We hope you will join us for our next conference call to discuss our second-quarter results.

Thank you for participating in today's Westlake Chemical Partners' first-quarter 2016 earnings conference call.

As a reminder, this call will be available for replay beginning two hours after the call has ended, and may be accessed until 11:59 PM Eastern Time on May 10, 2016.

The replay can be accessed by dialing the following numbers.

Domestic callers should dial 855-859-2056.

International callers may access the replay at 404-534-3406.

The access code is 90231034.