Westlake Chemical Partners LP (WLKP) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners third quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded today, November 8, 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 third quarter 2016 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 third 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 were 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 third quarter financial and operating results. This document is available in the press release section of our webpage 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 November 15, 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 96257816.

Please note that information reported on this call speaks only as of today, November 8, 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 is being broadcast live through an Internet webcast system that can be accessed on our webpage at wlkpartners.com. Now I'd like to turn the call over to Albert Chao.

Thank you, Ben. Good morning, ladies and gentlemen and thank you for joining us on our earnings call to discuss our third quarter results. In this morning's press release, we reported consolidated net income including OpCo's earnings of $76 million for the third quarter of 2016. Westlake Partners net income was $9 million.

We are pleased to have completed the turnaround and expansion project at our Petro 1 facility in Lake Charles, Louisiana during the third quarter. This expansion added 250 million pounds of ethylene capacity, which along with our plan to expand our Calvert City, Kentucky facility in the first quarter of 2017 should allow us to continue with our targeted annual low double digit growth rate off distributions.

On October 31, 2016, we announced an increase in distributions to our unit holders with respect to the third quarter of 2016. This 2.9% increase in distributions is the seventh consecutive quarterly increase in distributions to our unitholders since our initial public offering in August of 2014.

In regard to the IRS proposed regulations governing qualifying income for Master Limited Partnerships, we participated in the IRS hearing on this matter in October 2015 and had a number of subsequent meetings with the IRS and Treasury Department where we presented our view that our activities are clearly within the plain reading of the statute.

We believe that IRS interpretation of the law when issuing our private letter ruling was and still is correct. We continue to make this point to the IRS and the Treasury. I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the third 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 $76 million on consolidated sales of $229 million for the third quarter of 2016. Westlake Partners net income was $9 million or $0.32 per limited partner unit. We also reported MLP distributable cash flow of $7 million for the third quarter.

Third quarter net income for Westlake Partners decreased by $7 million or $0.05 per limited partner unit when compared to the third quarter of 2015. MLP distributable cash flow of $7 million was $2 million lower than the third quarter of 2015. This decrease in net income and MLP distributable cash flow was primarily due to the planned turnaround and expansion project of OpCo's Petro 1 unit, which was completed in July 2016. The Partnership's third quarter 2016 net income of $9 million was [$683,000] or $0.02 per limited partner unit lower than second quarter 2016 net income.

MLP distributable cash flow was $3 million greater than the second quarter MLP distributable cash flow. This increase in MLP distributable cash flow was the result of higher operating rates at our Calvert City facility and the increased production at our Petro 1 unit as we ramped up production starting in July. The benefit from our 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 the margin volatility that can be associated with the ethylene business.

This ethylene contract, which is structured and generated 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 a recently completed 250 million pound ethylene expansion of our Petro 1 plant at our Lake Charles facility, we are also preparing for the expansion of our Calvert City facility which we have scheduled for the first quarter of 2017.

This outage to complete the expansion is planned for approximately three weeks and will in addition to other incremental capacity increases bring our annual ethylene capacity at Calvert City to 730 million pounds. While the expansion of our Petro 1 facility led to a temporary lower coverage ratio this quarter of 0.75 times, we expect the additional capacity to drive higher production and grow our earnings and cash flows later this year and into next year which is expected to bring our coverage ratio back to the target level of 1.1 times for the fourth quarter.

Beginning in the second quarter of 2016, we experienced an outage at OpCo's Calvert City facility, which was a force majeure event under the ethylene sales agreement with Westlake Chemical. As such, if OpCo is not made able to make up the lost production throughout the remainder of the year, Westlake will be obligated to pay for 95% of the incremental cost incurred as well as the $0.10 margin on the production in which OpCo is unable to make up.

For the third quarter of 2016, OpCo spent $100 million in capital expenditures as we completed the expansion of our Petro 1 plant. As Albert stated this 250 million pound expansion began in mid-April and was completed at the end of July.

At the end of the third quarter, we had a consolidated cash balance of $75 million of which $71 million was held at OpCo and $4 million at the Partnership level. Long-term debt was $595 million of which $460 million was at OpCo and $135 million was at the Partnership.

On October 31, 2016, we declared a quarterly distribution to unit holders of $0.3353 per unit. This increase in distribution is a $0.094 per unit represents a 2.9% increase from the second quarter 2016 and continues us down the path to deliver consistent quarterly increases targeting an annualized low double digit growth rate. The excess of distributions over distributable cash flow this quarter will be funded from cash currently on hand at the MLP.

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 unit holders. This enables us to successfully pursue drop-down transactions, organic growth and third-party acquisition opportunities to increase distributions to our unit holders.

Looking forward we are preparing for the upcoming expansion of our Calvert City facility in the first quarter of 2017. The additional 250 million pounds of ethylene capacity already achieved through the recently completed Lake Charles expansion, along with a planned 100 million pound expansion in Calvert City will allow us to continue our targeted low double digit growth rate in distributions. We will continue to assume -- we continue to assess future growth opportunities that allow us to grow MLP distributable cash flow.

Thank you very much for listening to our third quarter earnings call this morning. Now I will turn the call back over to Ben. 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 conclusion of our call. Katie, we are now prepared to take questions.

(Operator Instructions)

Matthew Blair, Tudor Pickering.

Good morning, Albert and Steve.

Good morning.

Steve, if the IRS keeps its proposed MLP interpretation, could you just outline the various options that Westlake LP would have going forward? And then especially could you go over I think there is an option to increase your depreciation to defer some taxes. So if you could just explain that, that would be very helpful? Thank you.

Sure, well there are a variety of outcomes. So should the IRS stay right where they are let's say, we've been told through their proposed regulations that we'd be granted a 10-year grandfather provision. So we'd have a 10-year period to assess all options.

Among those options are a variety of range of options and I won't explore all of those, but one of those that you mentioned this morning in the call is what I would call a taxable partnership structure which is really a C Corp structure that gives us the same shield provision, the same shield mechanics as an MLP provision to an investor. And allows us to continue to make distributions in a manner that is consistent mechanically and from a tax perspective as we do today. That's one option that we'll certainly consider during this time period when we enjoy the grandfather, should that arise.

Okay, and any idea on how long the tax shield would last on top of the 10-year grace period?

We believe we have a very long shield so without getting into the math of this, I think you will find that if you look at the remedial shield that we have that it is a very long-lasting shield.

Okay, and then thanks for the additional details on the Calvert City expansion next year. I guess just in terms of financing this expansion, so this would be incremental debt coming in to the Partnership. Could you just give us an idea of how much, how much new debt is coming in and whether it would be at the OpCo level or whether it would also move down to the Westlake LP level?

The investment is going to occur at the OpCo level and so OpCo has a line of credit with Westlake Chemical. It used part of that line of credit as it expanded our Lake Charles Petro 1 unit this year. And so certainly as we have higher production certainly the opportunity to repay that loan is available to OpCo. So certainly this would just be another draw on that facility to complete this Calvert City expansion both because the expenditures are occurring in 2016 to be completed in 2017.

And then just to wrap up, is it overall fair to say that you'll have less turnaround activity in 2017 compared to 2016?

It is fair because the expansion in 2017 we expect to be a much shorter outage. The guidance we have given is three weeks and that's the only ethylene expansion or outage we have in 2017.

Great. Thank you very much.

You're welcome.

(Operator Instructions)

Guy Dietrich, Dietrich Capital.

Thank you. I believe the comment period for the IRS ended back in August of last year. I'm just frankly perplexed at why it's taking so long for them to come up with a final decision on this. Have you got any thoughts on that yourself? And have you had any fresh dialogue with them that would give you any sense of when we might expect a final ruling?

We have had regular dialogue with both treasury and the IRS and the most recent public comment is consistent with what they're telling us also privately. Curt Wilson, who is the Associate General Counsel, the IRS made a public comment back in D.C. at the Master Limited Partnership Association conference about 45 days ago and he said that he believed regulations would be issued within the calendar year 2016. There are obviously a series of reviews that have to be held between now and when those regulations are released. But he felt that they would be released in the calendar year and so we're hopeful that they are.

Great, thank you.

You're welcome.

At this time, I am showing no further questions. I would like to turn the call back to Mr. Ederington for closing remarks.

Great. Thank you, Katie. Thank you for participating in today's call. We hope you will join us for our next conference call to discuss our full-year and fourth quarter results. Have a good day.

Thank you for participating in today's Westlake Chemical Partners third-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 November 15, 2016. 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 96257816.