Westlake Chemical Partners LP (WLKP) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Westlake Chemical Partners First Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded, today, May 3, 2018.

I would now like to turn the call over to your host, Jeff Holy, Westlake Chemical Partners Vice President and Treasurer.

Sir, you may begin.

Thank you, Valerie.

Good morning, everyone, and welcome to the Westlake Chemical Partners First Quarter 2018 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'll open the call up 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 the prevailing economic conditions, actual and proposed governmental regulatory actions, competitive products and pricing pressures, our ability to borrow funds and access capital 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 today at 2 p.m.

Eastern time until 11:59 p.m.

Eastern Time on May 10, 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 for both numbers is 6086876.

Please note that information reported on this call speaks only as of today, May 3, 2018, and therefore, you're advised that time-sensitive information may no longer be accurate at 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, Jeff.

Good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter 2018 results.

In this morning's press release, we reported consolidated net income including OpCo's earnings of $81 million for the first quarter of 2018.

Westlake Partners' first quarter net income was $12 million.

On April 30, 2018, we announced distributions of $0.3975 per unit with respect to the first quarter of 2018.

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

This is the 13th consecutive quarterly increase in distributions to our unitholders since our IPO.

For the first quarter 2018, MLP distributable cash flow provided coverage of 1.13x the declared distributions.

I would now like to turn the 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 $81 million on consolidated sales of $284 million for the first quarter of 2018.

Westlake Partners' first quarter 2018 net income was $12 million or $0.36 per limited partner unit, and MLP distributable cash flow for the quarter was $15 million or $0.45 per limited partner unit.

For the first quarter 2018, OpCo's production of 898 million pounds increased 14 million pounds compared to the first quarter 2017 production of 884 million pounds, but decreased 69 million pounds compared to the fourth quarter of 2017's production of 967 million pounds.

First quarter 2018 net income from Westlake Partners of $12 million increased by $2 million or $0.01 per limited partner unit compared to first quarter 2017 Partnership net income of $10 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.

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

First quarter 2018 MLP distributable cash flow of $15 million increased $3 million from first quarter 2017 MLP distributable cash flow.

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

The Partnership's first quarter 2018 net income of $12 million decreased $3 million from fourth quarter of 2017 net income of $15 million, due to lower third-party sales prices and decreased production resulting from a power outage by one of our power providers and supply constraints of industrial gases caused by third parties.

First quarter 2018 MLP distributable cash flow of $15 million decreased $2 million from fourth quarter 2017 distributable cash flow of $17 million.

The decreases in net income and MLP distributable cash flow for the first quarter of 2018 was primarily due to lower production compared to the prior quarter.

The benefit from the long-term Ethylene Sales Agreement with our sponsor, Westlake Chemical, 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 take-or-pay provisions with Westlake Chemical incentivize us to continue to look for opportunities to increase capacity and operating rates.

Turning our attention to the balance sheet and cash flows.

At the end of the first quarter, we had consolidated cash balances of $25 million and cash invested with Westlake Chemical, through our Investment Management Agreement of $135 million.

The $135 million in cash invested through the Investment Management Agreement includes both cash generated from our operations throughout the quarter and the reserve for turnaround expenditures.

Our next turnaround is at our Petro II facility in Lake Charles, Louisiana, which is currently scheduled for 2019.

However, we'll provide more guidance later in the year on that schedule.

Long-term debt was $478 million, of which $224 million was at OpCo and $254 million was at the Partnership.

For the first quarter 2018, OpCo spent $10 million in capital expenditures.

On April 30, 2018, we declared a quarterly distribution to unitholders of $0.3975 per unit.

This was our 13th consecutive increase in quarterly distributions to unitholders, and is a 12% increase when compared to the first quarter 2017 and a 2.9% increase over the fourth quarter 2017 distributions.

First quarter 2018 MLP distributable cash flow of $15 million provided coverage of 1.13x the declared distribution.

Now I'll 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, along with the 4 levers of growth, formed the foundation for us to deliver long-term growth in distributions to our unitholders.

We continue to evaluate all of 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 and cash flows 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 distribution growth.

OpCo has a large drop-down capacity, and the Partnership plans to increase its 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 completion in 2019.

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

Thank you very much for listening to our first quarter 2018 earnings call this morning.

Now I'll turn the call back over to Jeff.

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 today at 2 p.m.

Eastern time.

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

Valerie, we'll now take questions.

(Operator Instructions) Our first question comes from Stephen Byrne from Bank of America.

Albert, you just mentioned that Lotte Chem joint venture you have and the option you have to buy into the 50% of the output.

Can you talk a little bit about the approximate cost to do such?

And describe the process and likely duration at which that could be dropped into the MLP?

Certainly.

I'll ask, Steven...

Yes.

So, Steve, the -- as you know, we have a 10% ownership interest in the cracker today, and that additional option that we have is available to us after 3 years post completion.

That additional 40%, if we elect to make that investment, would add 880 million pounds of additional ethylene if we chose to elect it.

The option is at total installed cost plus a single-digit interest cost of carry.

We don't know what that cost is, because the plant is still being completed at this stage.

So as we assess the interest in doing so, it's again a focus on what is the return to us given the structures that we would contemplate.

If we chose to drop either our 10% interest or at some future date, a larger interest, we would want to make sure it provides the same stable stream of income that the existing ethylene plants provide to the Partnership today.

So our focus is always maintaining stable income streams that provide the predictability of earnings and distributions that we have historically provided.

And is it likely that, that decision would be delayed towards the end of that 3-year option term that you have?

Or particularly given where ethylene prices are now?

We'll just have to make that assessment as we look at the market and look at the completion of this project.

And so it's impossible for me to give you a timing at this stage.

We'll just have to make the assessments as we complete the project.

Our next call comes from Duffy Fischer of Barclays.

This is Mike Leithead on for Duffy this morning.

Can we just get an update on your latest thinking regarding another potential drop-down this year or maybe heading into 2019?

And how would you rank kind of the attractiveness of the other 3 distribution growth levers you walked through?

Yes, it's a very good question.

And I think as we look at the 4 levers that are available to us, I think all of them are freely available to us.

As you think about them, Albert walked through, of course, the recent drop-down that he made reference to that we completed in September that was effective in July of last year.

But we also have the availability of margin expansion today.

As you well know, we have a $0.10 net margin provided for production.

And certainly, that could be increased based on the negotiation between the Partnership and its sponsor to some higher number.

Debottlenecking is an opportunity that you've seen us take -- opportunities to expand our crackers over time.

And certainly, we just spoke about the potential opportunity to acquire interest in other crackers, such as Lotte, that could be contributed and provided at stable income stream.

So you can see we have substantial capacity to both drop-down and expand the cracker margin if we you chose to negotiate for that, as well as the future opportunities for the Lotte cracker.

So you can see, our ability to continue to provide long-term growth and distributions is quite clear.

And it is our clear intention to continue to provide that low double-digit growth rate that we've been on the path since the IPO.

So as we think about that, you can see that we are on that path and have a variety of levers to do so.

From a timings perspective, we'll just look and see what the right timing is based on a variety of movers.

But we have, as you can see, a variety of levers to make sure that, that opportunity is provided for, for the unitholders.

Great.

And if I look at industry spot ethylene margins, it looks like 1Q is down about $0.07 to $0.08 a pound, sequentially.

Is that the rough order of magnitude that Westlake saw in the quarter for its merchant ethylene sales?

Or would you say that your margins maybe were hit a bit harder with some of the disruption issues you called out in the quarter?

Well, as we think out selling that 5% component, that's done in a market condition.

And so I think it's fair to think in terms of just market conditions selling ratably over the course of any period of time -- over any quarter, let's say.

Our next question comes from Robert Balsamo of B. Riley.

I was wondering if you could give a little more color around the power outage and supply constraints that happened during the quarter?

And in particular, if there's any carryover into 2Q, in particular, for constraints?

No, no.

Unfortunately, we did have a third-party power provider that dropped power at the plant.

We came back relatively quickly.

We certainly regret having lost power by our third-party power provider.

And at the same time, the other event was a -- a constrained provide -- provision of some industrial gases at a different site.

And so those have been restored.

And so no continuing issues here into 2Q or beyond that we would expect.

So do you expect to maybe push above nameplate capacity for 2Q to catch up a little bit for Westlake?

We're certainly incentivized to produce maximum rates because we're paid that $0.10 net margin on every pound that we produce.

So we'll certainly be doing everything we can to maximize production to achieve maximum earnings throughout the second quarter.

And frankly, beyond.

That's helpful.

And just my second question actually is related to margin.

You've talked in the past and you mentioned just a minute ago about the potential to expand the contracted margin with the parent.

I would think that this environment where ethylene margins are a bit narrower, but the overall polyethylene margin for Westlake Chemical Corp was a little bit wider.

These might be kind of -- would lend itself more to a potential expansion.

Could you maybe talk a little bit more about that option in the context of kind of current market and the attractiveness?

Certainly.

So as we think about the opportunity to expand that margin from $0.10 to something higher, certainly, as we think about a dialogue with our sponsor, Westlake Chemical, from their perspective, they're looking at the integrated ethane to, let's say, derivative margin.

So the ethylene margin, to them in their integrated olefins business as an example, is really much wider than just the ethylene margin that we see today, because they're taking that ethylene and putting that downstream into derivatives.

And certainly, they're also a buyer of ethylene in their vinyls chain.

So if we think about expanding that margin and negotiating with our sponsor for a higher margin, moving from, let's say, $0.10 to something higher, let's say, arbitrarily an additional $0.01.

That takes us 10% growth in earnings as soon as that should be negotiated using that example.

So that's just simply a negotiation between the Partnership and the sponsor to make that happen.

It's an opportunity that is one of the 4 levers of growth and we think it's very viable.

(Operator Instructions) We have a question from Matthew Blair of Tudor, Pickering.

I wanted to touch on the 5% of ethylene market sales.

Correct me if I'm wrong.

I think that is based more on a spot price than a contract price.

So could you just talk about how much longer you think these spot ethylene prices are going to stay low and whether you have any opportunities to switch that pricing mechanism more to a contract price going forward?

Well, so Matthew, we do sell ratably throughout the quarter.

And certainly as we think about it, we're looking to maximize margin of those pounds that are sold in that 5% arena.

And so certainly, selling them at prices other than contract -- other than spot such as contract, it certainly could be something to be considered.

And certainly as we look forward, we expect some of the derivatives that have been under construction and are expected to start up over the '18, '19 time period, will begin to start up and consume some of the long ethylene position in the market, eventually bringing ethylene prices higher into the marketplace.

It is something we certainly watch on an ongoing basis, and certainly look to maximize the value for every pound that we're selling into the merchant market.

Got it.

And then it looks like you'll likely reach the high splits on the IDRs by, I guess, probably the third quarter of this year.

Does that limit your options on third-party acquisitions or would you think about doing an IDR waiver?

Matthew, as you would imagine, we're well aware in investors' minds that incentive distribution rights is very topical, and certainly, we're looking at that and assessing a wide range of alternatives to make sure that we're providing maximum value to both our unitholders and to the Partnership.

And so those are issues that we're certainly understanding very topical, and certainly, we're doing everything that we can to maximize the value to both the Partnership and our unitholders.

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 hope you'll join us for our next conference call to discuss our second quarter 2018 results.

Thank you for participating in today's Westlake Chemical Partners' First Quarter 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 Standard Time, May 10, 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 6086876.