Westlake Chemical Partners LP (WLKP) 2018 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 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 6, 2018.

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

Sir, you may begin.

Thank you, Michelle.

Good morning, everyone, and welcome to the Westlake Chemical Partners third 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 third 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 we'll then 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're 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 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 web page at wlkpartners.com.

A replay of today's call will be available beginning today at 3:00 p.m.

Eastern time until 11:59 p.m.

Eastern time on November 13, 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 7085308.

Please note that information reported on this call speaks only as of today, November 6, 2018, and therefore, you're advised that time-sensitive information may no longer be accurate as 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 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 third quarter 2018 results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $84 million for the third quarter of 2018.

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

On October 31, 2018, we announced distributions of $0.4207 per unit with respect to the third quarter of 2018.

This is a 2.9% increase from the second quarter 2018 distribution, and 12% increase from the third quarter 2017 distribution.

This is the 15th consecutive quarterly increase in distributions to our unitholders since our IPO.

For the trailing 12 months, MLP distributable cash flow provided coverage of 1.2x the declared distribution.

On July 27, 2018, the Partnership reset the distribution targets, which determine the payments to incentive distribution rights, with the new first year established at a quarterly distribution of $1.29 per unit from the previous first year target of $0.32 per unit.

The effect of this reset would allow the Partnership to increase its quarterly distribution in line with historical growth rates for over 10 years before the next incentive distribution rights, or IDR payment is earned and paid.

While distributions to the IDRs were a small portion of Partners cash flows, we wanted to proactively address the investor interests regarding the IDRs in a manner that will be mutually beneficial to both the Partnership and our sponsor, Westlake Chemical.

We believe this transaction accomplishes these goals and provides significant long-term benefits to both the Partnership and Westlake Chemical.

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 $84 million on consolidated sales of $364 million for the third quarter of 2018.

Westlake Partners third quarter 2018 net income was $12 million or $0.38 per limited partner unit, and the MLP distributable cash flow for the quarter was $15 million or $0.47 per limited partner unit.

For the third quarter 2018, OpCo's facilities ran at full capacity.

Third quarter 2018 net income for Westlake Partners of $12 million decreased by $1 million compared to third quarter 2017 Partnership net income of $13 million.

This decrease in net income was mainly attributable to lower margins on third-party ethylene sales.

Third quarter 2018 MLP distributable cash flow of $15 million decreased $500,000 as compared to the third quarter 2017.

The decrease in MLP distributable cash flow was primarily due to lower margins in the third-party ethylene sales, partially offset by increased production and lower maintenance capital expenditures at OpCo, and the elimination of the IDR payments to Westlake as a result of the amendment of the Partnership agreement to reset the IDR distributions in July 2018.

The Partnership's third quarter 2018 net income of $12 million decreased $400,000 from the second quarter 2018.

Third quarter 2018 MLP distributable cash flow of $15 million decreased $1 million compared to the second quarter of 2018 MLP distributable cash flow of $16 million.

Net income and MLP distributable cash flow for the third quarter of 2018, both decreased due to lower margins on OpCo's third-party ethylene sales, partially offset by higher production as compared to the prior quarter.

MLP distributable cash flow for the third quarter of 2018 also benefited from lower maintenance capital expenditures.

For the first 9 months of 2018, net income for the Partnership of $37 million increased $4 million from the first 9 months of 2017 net income to the Partnership of $33 million.

MLP distributable cash flow of $46 million increased $8 million from the first 9 months of 2017 MLP distributable cash flow of $38 million.

The increase in net income and MLP distributable cash flow 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, an increased production at OpCo, partially offset by lower third-party sales margins.

This increase in production includes the additional capacity from the 100 million-pound per year ethylene expansion at our Calvert City facility completed in April 2017.

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

This take-or-pay agreement has 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 the take-or-pay provisions with Westlake Chemical, incentivize us to continue to look for opportunities to maintain our historical high operating rates.

Turning our attention to the balance sheet and cash flows.

At the end of the third quarter, we had consolidated cash balance of $17 million and cash invested with Westlake Chemical through our Investment Management Agreement of $152 million.

The next planned turnaround is at our Petro 2 facility in the Lake Charles, Louisiana, which is currently scheduled for the first half of 2020.

The funds for this turnaround have already been reserved and funded at OpCo.

We'll provide more guidance on the specifics of this turnaround as we get closer to the event.

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

For the third quarter of 2018, OpCo spent $13 million in capital expenditures.

On October 31, 2018, we declared a quarterly distribution to unitholders of $0.4207 per unit.

This was our 15th conservative increase in quarterly distributions to unitholders and is a 12% increase when compared to the third quarter of 2017, and a 2.9% increase over the second quarter of 2018.

Third quarter 2018 MLP distributable cash flow of $15 million provided trailing 12-month coverage of 1.2x the declared distribution.

As Albert mentioned earlier in the call, on July 27, we amended the Partnership agreement to reset target distribution tiers.

The first -- the new first tier, in which the IDRs received 15% of the distributions, has been reset to a quarterly distribution of $1.29 per unit from the previous target of $0.32 per unit.

The 50% tier has been reset to a quarterly distribution of $1.69 per unit from $0.41 per unit.

This reset of the target distribution tiers will allow the Partnership to increase its distribution per unit at a low double-digit growth rate for over 10 years before the next IDR payment is earned and paid.

We believe these new targets provide a number of benefits to the Partnership: first, the Partnership did not pay any consideration, the reset is immediately accretive to unitholders.

Next, removing the IDR cash flow burden reduces the frequency and size of the capital needs of the Partnership, allowing it to more opportunistically access the capital markets as well as improving the Partnership's cost of capital.

Being relieved of the IDRs for the foreseeable future, Partners is better positioned to pursue accretive investment such as Westlake's joint venture ethylene cracker in Lake Charles, currently being built with Lotte Chemical that is expected to start up in 2019.

Finally, the IDR reset highlights the significant strategic alignment between the Partnership and its sponsor, Westlake Chemical.

The ability of the Partnership to be a long-term cost advantage source of equity capital for Westlake Chemical is a strategic asset that has and will continue to play a significant role in Westlake's plans to continue its growth.

As such, on October 5, 2018, we announced the commencement of $50 million at-the-market equity offering program.

We believe this program will provide another avenue to effectively and efficiently raise lower-cost equity proceeds as we pursue all 4 levers of growth, available to us to grow our distributions and cash flows.

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, along with the 4 levers of growth form 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 expansion 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 the Westlake and Lotte are constructing could be considered an opportunity for acquisition after its completion in 2019.

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

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

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

Thank you, Albert.

Before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available starting today by 3:00 p.m.

Eastern time.

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

We'll now begin to take questions.

(Operator Instructions) Our first question comes from Stephanie Burns -- I mean, Stephen Byrne of Bank of America Merrill Lynch.

This is Ian on for Steve.

In talking about the 4 levers you have to pull, double-digit distribution growth and one of the factors you called out was perhaps this expansion with Lotte.

What would the potential timing of that before for a drop-down?

And what kind of ranges of potential mechanics of that type of transaction are you evaluating?

Ian, we would expect that the ethylene plant being jointly built with Lotte would be completed in the first half of 2019.

We'd certainly want to consider that -- make sure that plant is running reliably and effectively before we consider it as an opportunity to contribute the ownership that Westlake has into the operating company.

It'll be something that we'll assess.

And as you know, we also have a significant amount of remaining capacity in OpCo that could also be dropped into the Partnership.

So we highlight that as certainly an acquisition opportunity.

But we certainly still have a significant amount of capacity in the operating company still to drop into the Partnership as well.

Our next question comes from Michael Leithead of Barclays.

Just on ethane, the biggest issue seemed to be a fractionation and pipeline capacity tightness, which I believe is considered MLP-qualified earnings.

So I wanted to see if potentially investing in those types of upstream assets would be of interest to Westlake, or rather you would deem those to be outside of the core competency of your current business.

Well, Mike, we assess really opportunities to provide a stable income stream, and therefore, a predictable distribution flow from the business.

And so as we look out on across the landscape, any asset that is qualified by the IRS would be conceptually interesting, but we would also make to make sure that we could provide the stability that I just mentioned, and the predictability of any asset in that portfolio that we consider.

So if we can construct such a structure, it would be of interest to us.

Great, that's helpful.

And then could you just touch on the dynamics you're seeing in the spot ethylene market?

And how you think that plays out over the next few quarters?

Yes, the spot ethylene market is rather thin, and certainly, it moves with supply and demand.

And as the derivative plants are catching up with new ethylene plants being built, there could be excess ethylene in the market.

But eventually, I think the ethylene in derivative markets will be more balanced.

And also, secondly, by the end of next year, the ethylene export terminal in the U.S. will be finished.

So that provides another avenue for U.S. ethylene to be exported.

Our next question comes from Matthew Blair of Tudor, Pickering, Holt.

Steve, you mentioned the Partnership remains in the long-term plans for WLK.

I was hoping you can talk about the overall strategy here, just given that these sorts of drop-down MLPs aren't quite in as much favor as they used to be.

Are you looking harder at, I guess, external M&A that would add third-party business and transform Westlake LP into more of a stand-alone company?

Or are you pretty content with keeping it as more of a drop-down story going forward?

Well, Matthew, the key that we see is to provide that stable predictable income stream and the distributions that are, therefore, also very predictable.

So as we think about the opportunities to grow the Partnership, we've highlighted here potentially the inclusion of the Lotte ownership interest as a potential acquisition target.

But we also assess opportunities that might be, again, qualified income streams that could provide that stability.

So we recognize that given the capital issues in some of the marketplaces, others haven't had as many levers we've, as you've heard us talk about before, 4 levers of growth.

We can expand our assets, we can acquire assets, we can do a -- we can expand margins, and we can do drop downs.

So I would say that while we are a -- while we have demonstrated drop-down capacity in the past, I would characterize our Partnership to be more than just a drop-down story that we actually have 3 other levers that we can work on to provide growth to our unitholders, and growth in earnings and distribution capacity.

So I think that there's certainly opportunities to grow in those other forms of expansion on those other 3 levers other than just drop downs.

We certainly assess the viability of the Partnership on a regular basis and we still see it as very viable and very important to Westlake Chemical.

Go it.

Thank you.

And then, I guess with the ATM, should we assume that that will be fully exercised in Q4?

And could you comment too on any potential upcoming drops?

Yes, we'll certainly open the window after we get past the normal blackout period for the ATM program, and certainly we'll look to add to liquidity as the facts and circumstances provide.

Certainly, we recognize that liquidity is a consideration for all unitholders, and it's important to us and so the ATM program is designed to be able to deal with that.

As it relates to the drop schedule, we certainly are mindful that as we continue to move forward, we've continued to grow the distributions.

And I would expect that between the next 3 to -- 2 to 3 quarters, that we would expect a drop-down in that portfolio to allow the continued growth in distribution, and therefore, growth in earnings.

Our next session comes from Eric Petrie of Citi.

Do you expect your turnaround reserves and maintenance CapEx cost to be similar year-over-year in 2019?

And how should we think of those stepping up in 2020 with Petro 2 turn around?

Yes, the maintenance cost should be very predictable between 2018 and 2019, now that we have the turnaround schedule for 2020.

And so 2019 will look, from a maintenance activity level, very similar to 2018.

And as we get into 2020, we'll give more guidance in terms of the cost and the numbers of days of added to the plan for that turnaround.

We're doing the detailed work now, and as I noted in my prepared remarks, we have the adequate capital already reserved in cash to be able to provide for the cost of that major turnaround in 2020.

(Operator Instructions) Our next question comes from Jon Evans of SG capital.

Steve, could you just follow up again a little bit on the strategy with the ATM?

So is that your hope if that's successful, will you use those proceeds to fund drop-downs instead, and you would just be able to do it over time and put more liquidity in the stock?

Or what's the strategy there?

Yes, the strategy there is to be able to address the desire to have, what I would consider, a periodic dribble, as these programs are sometimes called, dribble of units into the marketplace.

We certainly also have the ability to respond to reverse inquiry either through our direct offering -- a registered direct offering or through the ATM program.

And then of course, the Partnership has cash that it's -- currently sitting in its hands above and beyond the turnaround reserve, of course, that it could also use to acquire ownership interest in OpCo.

And then of course, the fourth option would be to consider going out into the market and issuing units.

But as I see it, we have a variety of options to be able to fund any drop-down needs.

And given that we've reset the incentive distribution rights, it greatly relieves the need to go to the market in size to be able to accomplish the growth in distribution that we've been working with for 4 years since the IPO.

So to just follow up with that, if you do another drop-down potentially in the next 2 to 3 quarters, is it about $50 million?

Or is it bigger than that?

Or what do you think roughly the size is to continue to put you on that kind of growth path for the next couple of years?

That's -- that's the order of magnitude.

Okay.

And then, just...

Oh, and I would say, of new equity.

New equity, okay.

And then the last question, Lotte, I mean, that's going to be a

(technical difficulty)

project.

Would you slowly bring that into the Partnership from OpCo?

Or how would you envision that?

Or would it be one would be one fell swoop?

The answer is, it can be done in a variety of different ways.

It could either be brought in, in component pieces or it could be brought in all-in-one interest if you will.

And it's really a function of how we think we need to bring that in if the valuation negotiation between Westlake Partners and OpCo and Westlake Chemical were all agreeable.

So it's, as I said, a variety of levers that we can pull to bring the ownership interest into OpCo.

And of course, as I noted, we still have a very sizable portion of OpCo yet to be dropped into the Partnership.

So while we've highlighted the Lotte ethylene unit as one that could be an acquisition target, even if we choose to do that at some future date, we still have plenty of capacity in OpCo to fuel the growth in distributions for a very long period of time.

Okay.

And then just the last question, I promise.

You're not looking to go to a C Corp, right?

You've done the IDR, that's all you feel like you need to do on the structure of the Partnership.

Is that correct?

We're still pleased with the structure that we have in mind.

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 fourth quarter and full year results.

Thank you for participating in today's Westlake Chemical Partners Third 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 on November 13, 2018.

The replay can be accessed by calling the following numbers: domestic callers should dial (855) 259-2056; international callers may access the replay at (404) 537-3406.

The access code is 7085308.

Everyone, have a great day.