Westlake Chemical Partners LP (WLKP) 2017 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 2017 earnings conference call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, May 2, 2017.

I would now like to turn the conference over to your host, Ben Ederington, Westlake Chemical Partners Vice President and Chief Administrative Officer.

Sir, you may begin.

Thank you, Valerie.

Good morning, everyone, and welcome to the Westlake Chemical Partners first-quarter 2017 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 as well as the 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 prefer 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 olefins 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 webpage at wlkpartners.com.

A replay of today's call will be available beginning two hours after the completion of this call until 11:59 PM Eastern time on May 9, 2017.

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 6894700.

Please note that information reported on this call speaks only as of today, May 2, 2017, 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'd 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 $86 million for the first quarter 2017.

Westlake Partners' net income was $10 million or $0.35 per limited partner unit.

We are pleased to have completed the expansion of our Calvert City, Kentucky, facility, which, along with other initiatives, added 100 million pounds of annual ethylene capacity.

This expansion, along with a 250-million-pounds expansion of our Lake Charles, Louisiana, facility in July of 2016, allowed us to continue with our targeted annual low-double-digit growth rate of distributions.

Yesterday, we announced an increase in distributions to our unitholders with respect to the first quarter of 2017.

This 2.9% increase in distributions is the ninth consecutive quarterly increase in distributions to our unitholders since our initial public offering in August of 2014.

As previously stated, regarding the IRS regulations' governing qualifying income for master limited partnerships, we are pleased that the IRS and Treasury upheld its previously issued private letter ruling regarding production of ethylene in January of this year.

We appreciate the thorough process taken by the IRS and Treasury Department to reach its final decision and properly recognize these industry practices will continue to generate qualified income under the code.

With this uncertainty removed, all the strategies continued growth in distributions remain at our disposal, which Steve will speak to.

I now would 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 $86 million on consolidated sales of $277 million for the first quarter of 2017.

Westlake Partners' net income was $10 million or $0.35 per unit.

We also reported MLP distributable cash flow of $11.4 million for the first quarter.

First-quarter net income for Westlake Partners decreased by $2 million when compared to the first quarter of 2016.

This decreased net income was primarily due to reimbursements received by OpCo under the ethylene sales agreement with Westlake Chemical in the first quarter 2016.

MLP distributable cash flow of $11.4 million was $1.9 million higher than first-quarter 2016 MLP distributable cash flow of $9.5 million.

This increase in MLP distributable cash flow was primarily due to the increased production at OpCo's Petro 1 unit, which completed its 250-million-pound expansion in July 2016.

Partners' first-quarter net income of $10 million was $1 million or $0.04 per limited partner unit lower than fourth-quarter 2016 net income of $11 million.

This decrease in net income was primarily the result of decreased production at our Calvert City facility, as it was shut down in mid-March to complete the expansion and turnaround, which when combined with other initiatives brought Calvert City's ethylene production capacity to 730 million pounds.

MLP distributable cash flow was $400,000 lower than the fourth-quarter 2016 MLP distributable cash flow of $11.8 million.

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 flow from the 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 its take-or-pay provisions, incentivized us to continue to look for opportunities to increase capacity and operating rates.

As Albert mentioned, the recently completed expansion of our Calvert City facility, along with the 250-million-pound ethylene expansion at our Petro 1 plant completed in 2016, allowed us to continue with our plan of increasing distributions to unitholders at a low-double-digit growth rate.

For the first quarter of 2017, OpCo spent $23 million in capital expenditures as we worked towards the completion of the expansion project in Calvert City.

As of March 31, 2017, we had consolidated cash of $123 million, of which $118 million was held at OpCo, and $5 million held at the Partnership level.

Long-term debt was $600 million, of which $465 million was at OpCo and $135 million was at the Partnership.

Yesterday, May 1, we declared a quarterly distribution to unitholders of $0.3549 per unit.

This increase in distributions of $0.99 per unit represents a 2.9% increase from the fourth quarter of 2016.

Although our Calvert City facility was undergoing a planned turnaround the last two weeks of the quarter for the expansion and turnaround, the additional production from our 250-million-pound ethylene expansion at our Petro 1 facility helped provide a coverage ratio of 1.19 times for the quarter.

As Albert previously stated, now that the IRS has removed the uncertainty regarding the status of our operations, we have the full complement of strategies available for us to continue our growth in earnings and cash flow at a low-double-digit growth rate, including future dropdown transactions with OpCo, organic expansions of our current units, third-party acquisitions, and negotiating a higher ethylene margin.

Now 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 to increase distributions to our unitholders.

Looking forward, we will continue to delivered low-double-digit growth in distributions to our unitholders, while the recently completed expansion at Calvert City and Lake Charles positions us to be on that path.

We continue to assess all the levers 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'll 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.

Valerie, we are now prepared to take questions.

(Operator Instructions) PJ Juvekar, Citi.

Robert Balsamo, FBR.

Thanks for taking my question.

Just some housekeeping items.

Maintenance CapEx was lower than our expectations during the quarter.

I was wondering if you could speak a little bit to the full year on timing and how you see the maintenance CapEx spend through the rest of 2017?

Well, I would expect that there would be some seasonal increase, though not material in total.

But some seasonal increase as we get into the summer season for some of the work in our Lake Charles sites.

And remember, we completed some of the work at Calvert City's expansion that ended in Q2.

So there will be some carryover of some of that maintenance work in Q2.

And then we get back to kind of our normalized run rate of maintenance expense.

Would 2015 be more of a normalized run rate for comparison?

Yes.

That would be a good guidance.

Okay, great.

And then just as a smaller item.

On SG&A costs, it looked like it kind of ticked up a little bit during the quarter.

How to think about that moving forward, if that was impacted by the turnarounds or anything that might be nonrecurring?

This was a one-time, nonrecurring step-up.

It's not something I would take as a run rate.

Matthew Blair, Tudor, Pickering, Holt.

I was hoping you could comment on the $500 million debt shelf filing in the quarter.

Just what's your general thinking behind the filing?

And should we take this as an indication that you may be looking to ramp up drops in the future?

Thanks.

Certainly, as you heard me talk about the various levers that we have available to us, they include, certainly, drops, organic opportunities to expand our plants, and we just completed those.

Acquisition opportunities as well.

So certainly having the shelf available to us and ready to go is certainly important and appropriate, now that we have our business strategies aligned and ready to go forward with that plan.

Okay.

And what's your current guidance on the next drop that we should expect?

Well, certainly as you think about that, that's one of the alternatives we have.

And as you look at the growth rate that we've outlined, that low-double-digit growth rate, you would expect that one of those levers will be one of the levers we would use to continue that distribution growth.

Okay.

Okay.

The release mentioned that production was down quarter over quarter.

I think in Q4, it was 950 million pounds.

Could you disclose the production level in Q1?

I don't have it right in front of me.

But I will follow-up with you with a call.

But the reason, of course, for the lower production was we took Calvert City off-line in March to undergo this expansion that was completed in April.

So there was some lower production simply because we were undergoing that debottleneck at that time.

Right, okay.

And then finally, I guess any -- so I believe that the Calvert City turnaround stretched into April.

Any guidance on how we should be thinking about 2Q volumes?

Is it safe to say that production would be down again quarter over quarter in 2Q?

No, I would expect that we'll see -- that unit came back up after the completion.

I would expect that we would be able to make up those pounds during the course of the quarter.

Okay, thank you.

At this time, the Q&A session has now ended.

Are there any closing remarks?

Thank you again for participating in today's call.

We are hopeful 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 2017 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 Standard Time on May 9, 2017.

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 6894700.