Westlake Chemical Partners LP (WLKP) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Westlake Chemical Partners Fourth Quarter and Full Year 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 20, 2018.

I would now like to turn the conference over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer.

Sir, you may begin.

Thank you, Sabrina.

Good morning, everyone, and welcome to the Westlake Chemical Partners Fourth Quarter and Full Year 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 fourth quarter and full year 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'll open up the call to questions.

During this call, we refer to ourselves as Westlake Partners or the Partnership.

References to Westlake or 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 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 fourth quarter and full year 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 2 hours after completion of this call until 11:59 p.m.

Eastern Time on February 27, 2018.

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 8057838.

Please note that information reported on this call speaks only as of today, February 20, 2018, 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 would like to turn the call over to Albert Chao.

Albert?

Thank you, Jeff.

Good morning, ladies and gentlemen, and thank you for joining us to discuss our fourth quarter and full year 2017 results.

In this morning's press release, we reported consolidated net income including OpCo's earnings of $98 million for the fourth quarter of 2017.

Westlake Partners' fourth quarter net income was a record $16 million.

For the full year 2017, net income including OpCo's earnings was $353 million.

Partners' 2017 net income was a record $49 million.

2017 was a milestone year for Partners as we completed our first equity offering since our IPO in August 2014.

This offering was completed in conjunction with our second drop-down transaction, with MLP purchasing an additional 5% interest in OpCo.

This transaction was effective July 1 as we continued our path of growing distributions to our unitholders.

On January 29, 2018, we announced distributions of $0.3864 per unit with respect to the fourth quarter of 2017.

This is a 2.9% increase from the third quarter 2017 distribution and a 12% increase from the fourth quarter 2016 distribution.

This is the 12th consecutive quarterly increase in distributions to our unitholders since our IPO.

For the fourth quarter 2017, MLP distributable cash flow provided coverage of 1.35x to declared distributions, and we finished the year with coverage of 1.24x the declared distributions for the full year 2017.

I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the fourth 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 $98 million on consolidated sales of $309 million for the fourth quarter 2017.

Westlake Partners' fourth quarter net income was a record $16 million or $0.46 per limited partner unit.

We also reported record MLP distributable cash flow of $17 million for the fourth quarter.

Fourth quarter net income for Westlake Partners was $16 million -- of $16 million increased by $5 million or $0.07 per limited partner unit compared to a fourth quarter 2016 Partnership net income of $11 million.

The increase in net income was primarily due to the 5% increased ownership interest in OpCo as a result of the drop-down transaction that was effective July 1, 2017, and increased production at OpCo's Petro 1 facility in Lake Charles, Louisiana and Calvert City, Kentucky's facility.

This increase in production includes the added capacity from the 100 million pound ethylene expansion in Calvert City, which was completed in April 2017.

MLP distributable cash flow of $17 million for the fourth quarter 2017 was $5 million higher than the fourth quarter of 2016 MLP distributable cash flow of $12 million.

This increase in MLP distributable cash flow was primarily due to the increased ownership interest in OpCo, higher production and lower maintenance costs.

The Partnership's fourth quarter 2017 net income of $16 million was $3 million higher than third quarter 2017 net income of $13 million.

MLP distributable cash flow of $17 million was $2 million higher than third quarter MLP distributable cash flow of $15 million.

The increased net income and MLP distributable cash flow for the fourth quarter of 2017 was primarily due to higher production at all of OpCo's facilities compared to the prior quarter.

For the full year 2017, net income attributable to the Partnership was a record $49 million or $1.72 per common unit, which was $8 million more than 2016 net income to the Partnership of $41 million, or $1.50 per common unit.

The increase in net income attributable to the Partnership as compared to the prior year period was primarily due to the Partnership's increased ownership interest in OpCo.

MLP distributable cash flow of $55 million was $23 million higher than 2016 MLP distributable cash flow of $32 million.

This increase in MLP distributable cash flow for '17 is due to the increased production at all of OpCo's facilities, lower maintenance costs and higher ownership interest in OpCo for the second half of 2017 as compared to 2016.

2017 production benefited from the 250 million pound expansion at OpCo's Petro 1 facility, which was completed in 2016 as well as the 100 million pound expansion in Calvert City, which was completed in April 2017.

The benefit from the long-term Ethylene Sales Agreement with our sponsor, Westlake Chemical, is -- who is short ethylene for their derivative production, is a stable fee-based cash flow to the Partnership.

This take-or-pay agreement is 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 sales agreement, which is structured to generate a net margin of $0.10 per pound of ethylene to the Partnership, along with a take-or-pay provision with Westlake Chemical, incentivizes us to continue to look for opportunities to increase capacity and operating rates.

For 2017, OpCo spent $69 million in capital expenditures as we completed the turnaround and expansion at our Calvert City facility.

At the end of the fourth quarter, we had cash balance of $27 million and cash invested with Westlake Chemical through our investment management agreement of $137 million.

Long-term debt was $474 million, of which $220 million was at OpCo and $254 million was at the Partnership.

On January 29, 2018, we declared a quarterly distribution to unitholders of $0.3864 per unit.

This distribution is a 12% increase when compared to the fourth quarter of 2016.

Fourth quarter MLP distributable cash flow of $17 million provided coverage of 1.35x the declared distribution.

With respect to the full year 2017, we declared distributions of $1.48 per unit, an increase of 12% compared to 2016 declared distributions of $1.32.

2017 MLP distributable cash flow of $55 million provided coverage of 1.24x 2017's distributions.

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 the fixed margin take-or-pay Ethylene Sales Agreement with Westlake Chemical forms the foundation for us to deliver long-term growth in distributions to our unitholders.

We continue to evaluate all the levers of growth available to us to increase our earnings and cash flows, including organic expansions of our current ethylene facilities, periodic drop-downs of OpCo into the MLP, acquisitions of other qualified income streams either directly or jointly with our sponsor, Westlake Chemical; and negotiating a higher fixed margin in our Ethylene Sales Agreement with Westlake.

Looking forward, we plan to continue to deliver low double-digit growth in distributions to our unitholders.

The recent ethylene expansions in Lake Charles and Calvert City have added to our production capacity to fund these distributions.

Our most recent drop-down in the third quarter of 2017 highlights the ability of these accretive transactions with OpCo to fund earnings and distributable -- and distribution growth.

OpCo has a large drop-down capacity, and we plan to increase our ownership of OpCo in the future.

The new Gulf Coast ethylene cracker joint venture that Westlake and Lotte are constructing could be considered an opportunity for acquisition upon its completion in 2019.

Finally, we'll evaluate all 4 levers of growth to optimize our earnings and cash flow and maximize value for all stakeholders.

Thank you very much for listening to our fourth quarter and full year 2017 earnings call this morning.

Now I will turn the call back over to Jeff.

Thank you, Albert.

Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting 2 hours after we conclude the call.

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

Sabrina, we will now take questions.

(Operator Instructions) And the first question will come from the line of Steve Byrne with Bank of America.

Yes, I just wanted to ask about your capacity expansions of your ethylene crackers at Lake Charles and Calvert City in recent years.

Are there rate-limiting operations there that are either in the furnace or in the downstream recovery that you have excess capacity there that, to further debottleneck, wouldn't require the entire facility be expanded?

Or is it possible that it's just portions of those plants?

Well, certainly, our engineers constantly look at opportunities to further debottleneck and get more productions.

But I will say that a large part of the large capacity expansions has been completed.

But every day, our people are working to improve the operations.

And with respect to the joint venture with Lotte Chem, if you were to commit to that project earlier than later, are the economics any different?

No, Steve.

The economics are at producer economics.

And so if we elect to increase our ownership percentage, the investment for any incremental investment beyond our $0.10 -- or excuse me, our 10% is simply just the total installed cost to construct the facility and the reimbursement at a single-digit interest carry cost while Lotte's financing this during construction.

And the next question will come from the line of Duffy Fischer with Barclays.

It's Mike Leithead on for Duffy.

Just first, with the Westlake PVC, VCM announcements, you'll be consuming more ethylene internally now.

So does that change at all how you guys think about the 5% spot ethylene sales in the current agreement?

And does that impact the likelihood of the Lotte cracker being added to the current structure?

It does not change our thinking around the 5% being sold into the market.

We certainly still think that's important for a variety of reasons.

And as it relates to the Lotte investment, we'll continue to assess the return potential that has to Westlake Chemical.

And should they elect to increase their ownership from the 10% to a percentage higher than that, certainly, it increases the appetite for OpCo to think about buying even a greater share or potentially of negotiating that with Westlake, our sponsor, as they think about and make whatever decisions they choose to make.

Got it.

Okay.

And then you recently completed a nice drop-down in the third quarter.

How should we think about the cadence of drop-downs this year and beyond into '19?

As we think about continuing our growth strategy, as you can see, we have a very large amount of inventory to continue the drop-down.

We certainly can also think in terms of the other 3 levers that Albert made reference to, which is the margin arrangement today currently at $0.10 that could be increased over time, simply part of the negotiation; debottlenecking opportunities in the crackers that we have and any future cracker that we might own; as well as the opportunity to grow the business over time through acquisitions.

So when we think about the cadence, the answer really is, is a function of as long as we're seeing the value for the growth that is being offered here, we'll continue that cadence.

And that could continue us into '18 or early '19.

This drop-down that we concluded in the third quarter of 2017 provides us good runway into '18.

And so long as we're seeing the value trade-off with investors, we'll continue that cadence that is appropriate for the value and return for that growth.

And the next question will come from the line of Matthew Blair with Tudor, Pickering, Holt & Co.

I believe production was 925 million pounds in Q3.

Steve, do you have that number for Q4?

And is there any reason to believe that Q1 '18 production would be significantly different than Q4 '17 levels?

So Matthew, our production in the fourth quarter was just slightly under 970 million pounds.

And certainly given the demand that our sponsor has for ethylene, we want to continue to run these units as strongly as we can.

Our current plan for turnaround does not include 2018.

The thinking currently is for the next turnaround to be in 2019.

So absent any unusual events in operations, I would expect the plants to continue to operate as strongly and as well as they have been most recently.

Great, great.

And that on the balance sheet, could you just clarify this line item here that's Receivable under Investment Management Agreement?

So do you consider that $137 million to be WLKP cash?

If you could just clarify that, that'd be helpful.

Yes, it is cash, and it's freely available at really no notice.

They simply just need to call on that.

And it's simply just an investment mechanism for the Partnership, just as if they were investing with anybody else.

And they can call on that cash at a moment's notice.

(Operator Instructions) And the next question comes from the line of Robert Balsamo with B. Riley FBR.

Just a couple of housekeeping items.

First, could you clarify the debt level at the Partnership, just I guess the revolver at the current level?

Yes.

So at the Partnership, it's $254 million.

And at OpCo, it's $220 million.

Great.

And regarding the Lotte expansion -- the Lotte project, is there any change to the status on that?

Is it still on track 2019?

Any clarity around timing, if it has changed at all?

No, it has not changed.

And it's still expected to start up in the first half of 2019.

And we do have a follow-up question from the line of Matthew Blair with Tudor, Pickering, Holt & Co.

Yes, just one more.

I guess just in terms of valuation here.

So you maintained your 12% distribution growth rate since inception, despite what's been a pretty volatile MLP market.

You're sitting at 1.35 coverage.

You have a huge backlog of droppable assets.

Yet your yield is all the way up to 6.9%.

Are you happy with that?

Or do you think you're getting paid for your 12% growth rate?

How do you assess the valuation of MLP here?

Matthew, that's an excellent point, and the answer is no, I'm not happy with that.

I believe that we're not getting the full valuation that we merit.

And that's why when I was asked earlier by one of questioners about our growth plan for 2018, I made the comment that our growth is -- our growth in distribution is predicated on the fact -- on the assumption that we'll get value back.

And if we don't, we'll have to think about that growth plan.

At this time, the question-and-answer session has ended.

Are there any closing remarks?

Thank you again for participating in today's call.

We hope you will join us for our next conference call to discuss our first quarter 2018 results.

Thank you for participating in today's Westlake Chemical Partners Fourth Quarter and Full Year 2017 Earnings Conference Call.

As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 p.m.

Eastern Time on February 27, 2018.

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 8057838.