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

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 19, 2019.

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

Sir, you may begin.

Thank you.

Good morning, everyone, and welcome to the Westlake Chemical Partners fourth quarter and full year 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 fourth quarter and full year 2018, 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 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 webpage at wlkpartners.com.

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

Eastern time until 11:59 p.m.

Eastern time on February 26, 2019.

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 2638219.

Please note that information reported on this call speaks only as of today, February 19, 2019, 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 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 2018 results.

In this morning's press release, we reported the consolidated net income, including OpCo's earnings, of $82 million for the first -- fourth quarter of 2018.

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

On January 25, 2019, we announced the distributions of $0.4328 per unit with respect to the fourth quarter of 2018.

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

This is a 16th consecutive quarterly increase in distributions to our unitholders, bringing our aggregate increase in distributions since IPO to over 150%.

2018 MLP distributable cash flow provided a coverage of 1.12x to declared distributions.

As previously announced, in July of last year, the Partnership reset the tiers of -- for the incentive distribution rights, which will allow the Partnership to increase its quarterly distribution in line with historical growth rates for over 10 years from the rest -- from the reset, before the next incentive distribution right payment is earned and paid.

We feel this reset clears a path that will allow the Partnership to continue to grow earnings and cash flows and distributions as another way Westlake has demonstrated its continued support and long-term commitment to the Partnership.

I will now like to turn our call over to Steve to provide more details on the financial and operating results.

Steve?

Thank you, Albert, and good morning, everyone.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $82 million on consolidated sales of $336 million for the fourth quarter 2018.

Westlake Partners fourth quarter 2018 net income was $12 million or $0.37 per limited partner unit, and MLP distributable cash flow for the quarter was $15 million or $0.45 per limited partner unit.

Fourth quarter 2018 net income for Westlake Partners of $12 million decreased by $4 million compared to the fourth quarter 2017 Partnership net income of $16 million.

The decrease in net income was mainly attributable to lower margins on third-party ethylene sales and higher interest expense.

Fourth quarter 2018 MLP distributable cash flow of $15 million decreased $2 million as compared to the fourth quarter 2017.

The decrease in MLP distributable cash flow was primarily due to lower earnings on third-party sales and lower production.

The Partnership's fourth quarter 2018 net income and MLP distributable cash flow were comparable with the net income and distributable cash flow in the third quarter.

For 2018, net income for the Partnership of $49 million increased $700,000 from 2017 net income.

MLP distributable cash flow of $60 million increased $5 million from the 2017 MLP distributable cash flow of $55 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, and record production at OpCo, which is partially offset by lower third-party sales margins.

I think it's important to touch on the benefits of long-term Ethylene Sales Agreement with our sponsor, Westlake Chemical, an investment-grade company.

The sales agreement with Westlake Chemical will provide a stable fee-based cash flow to the Partnership through a take-or-pay agreement for 95% of our ethylene production, and protects the Partnership's cash flows from the margin volatility that can be associated with ethylene businesses.

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, incentivizes 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 fourth quarter, we had a consolidated cash balance of $20 million as well as cash invested with Westlake Chemical through our Investment Management Agreement of $149 million, totaling $169 million in available cash.

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

The next planned turnaround is at our Petro 2 facility in Lake Charles, Louisiana, and it's 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 the turnaround, including duration and expected cost, as we complete our planning and get closer to the turnaround.

With respect to the full year 2018, we declared distributions of $1.66 per unit, an increase of 12% compared to 2017 declared distributions of $1.48.

2018 MLP distributable cash flow of $60 million provided coverage of 1.12x the declared distributions.

As Albert mentioned earlier in the call, in July of 2018, we amended the Partnership agreement to reset the target distribution tiers for the incentive distribution rights.

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

As the Partnership did not pay any consideration, the reset was immediately accretive to the unitholders.

Furthermore, the IDR reset reduces cash flow burden, in turn, lessening the frequency and size of the capital needs of the Partnership.

This will allow us to more opportunistically access the capital markets as well as improving the Partnership's cost of capital.

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

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

Due to the steps that we've taken to this point, the Partnership is better positioned to pursue accretive investments such as Westlake's joint venture, 2.2 billion-pound-per-year ethylene cracker in Lake Charles, Louisiana, currently being built with Lotte Chemical that is expected to start up in the first half of this year.

Finally, these recent developments further signify the strategic alignment between the Partnership and its sponsor, Westlake Chemical.

The ability of the Partnership to be a long-term cost-advantaged source of equity 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.

Now I'll turn the call back over to Albert to make some closing comments.

Albert?

Thank you, Steve.

As we look into 2019, we will continue to benefit from the stable fee-based cash flow generated by the fixed-margin take-or-pay Ethylene Sales Agreements with Westlake Chemical, along with the 4 levers of growth, including organic expansions of our current ethylene facilities; periodic drop downs of incremental 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 Chemical, [forming] the foundation for us to deliver long-term growth.

We are currently evaluating all our options for continuing to deliver distribution growth to our unitholders.

The 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.

There is considerable drop-down inventory and the Partnership has plans to increase its ownership of OpCo over time.

The Gulf Coast ethylene cracker joint venture that Westlake and Lotte are constructing is continuing to be considered as an opportunity for acquisition after its startup.

In conclusion, we will continue to 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 fourth quarter of 2018 earnings call this morning.

And we look forward to speaking with you again next quarter.

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 today at 3 p.m.

Eastern time.

We'll provide that number again at the end of the call.

Latif, we will now take questions.

(Operator Instructions) Our first question comes from the line of Mike Leithead of Barclays.

One -- just one high-level question from me.

I guess there have been a few interesting dynamics over the past few quarters, both in terms of the ethylene market as well as just the general financial or MLP markets.

I was wondering when you think about the 4 levers of distribution growth you've outlined, I guess, since the IPO, how do you think about the relative opportunities between these 4 areas?

Or maybe how they all have shifted in light of current market conditions?

So, Mike, when we think of all 4 levers, we think they all remain very viable to us today.

Because when we think about the question that you may be really asking is, given the ethylene margin, how do we think about expanding that ethylene margin?

Now remember, our sponsor thinks of it in terms of ethane all to the way out to the derivative, let's say, polyethylene.

And there's still significant margin in that integrated chain to think about using an additional increase in margin in ethylene to permit that lever to work.

So whether it be expansions, drop downs, margin expansion or acquisitions, we think all 4 of those levers are very viable today, even in today's ethylene environment -- ethylene pricing environment.

Got it.

That's helpful.

And then just quickly on the turnaround schedule.

I believe I heard you earlier, no turnarounds scheduled until first half of 2020.

Is that correct?

Correct.

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

Steve, I'm not sure if I missed this, but could you disclose the production volumes in Q4?

You know, Matthew, we had record production throughout the course of 2018.

And so when you think of our stated capacity of 3.7 billion pounds, we exceeded that by single-digit percentages for the quarter.

And so while we haven't gotten into discussing the exact pounds, I would say that if you take that and recognize we had record production, we exceeded those -- that capacity by single digits.

A strong, strong performing quarter.

Okay.

And then so you recently reset the IDRs in what seemed like a pretty favorable transaction to Westlake LP, but the stock hasn't really moved.

It's still trading at a hefty 7.5% yield.

What do you think is next in terms of driving down this equity cost ahead of a potential drop from the Lotte acquisition?

Matthew, I think the thing that is a headwind for the Partnership is really the free float for the security.

And certainly, our transaction nearly 18 months ago was designed to begin to start that path to improve the liquidity and the trading -- the trading volume for the stock.

So certainly, as we move forward, that remains an important element.

Certainly, I can't address that overnight.

But certainly, our intention is, over time, to provide more liquidity to the stock so that as investors want to get in or out of the security, it has lesser of an impact on it.

And I think that's what's really preventing the stock from achieving its proper valuation, given the limited float that it has.

Okay.

And then lastly, I guess along similar lines.

You announced the ATM program last quarter.

It doesn't look like you used any of it.

What should we model in?

Or what are your expectations for drawing on this ATM program in Q1 '19 and potentially Q2 '19?

Matthew, I do expect that over the course of '19, we certainly expect to be able to issue units off the ATM program.

And so while I don't want to give specific guidance by quarter, I do expect that we will be able to issue units off the ATM program.

And it was designed to cover our requirements over the course of, let's say, a year to 18 months.

Our next question comes from Jon Evans of SG Capital.

Steve, you guys talked about on the Westlake call that, I think, you're going to do an expansion to the German facility.

Would you potentially drop that down?

Or in the Partnership, are you just looking for U.S. assets?

The limitation that we have is for assets that qualify under the IRS tax code, and so to the best that we know, those assets don't seem to qualify.

So as we think about the opportunity, we're going to take a look and see what assets seem to qualify and what assets fit within the parameters here.

Got it.

And then the other question, can you just give us any kind of insight at all or -- because there's -- obviously, the market for ethylene and ethane has been very volatile in Q4.

And obviously, there was a lot of questions of that on the Westlake call.

Can you give us any kind of sense of what kind of margin squeeze you had on that other 5% that you sold into the market?

Or do you not want to get that granular?

Well, I think if you take a look at the merchant market for ethylene, you can see that the margins are quite snug.

And so it -- so when you take a look out there, we're selling in the marketplace.

And I think if you just look at the benchmark prices demonstrated over the fourth quarter or even over the last 45 days or so, you will see that the ethylene margins have been tight.

And as we sell into the merchant ethylene market, those are the prices we see in the spot market.

So as I say, it's very clear in terms of where the spot ethylene market is.

And those are the prices that we see as we undertake transactions.

Got it, okay.

And then the last question I have just on the follow-up.

I mean, is it most likely that you'll do the drop down sometime in Q3 or Q4 off of the ATM?

It looks like you kind of need it by then to be able to continue the distribution growth of the 2.9% sequentially.

Or is there something I'm missing in the numbers?

So, Jon, we've consistently said that we expect that over the course of probably the first half of this year, we expect that there'll be a transaction, but that's somewhat of a function of the size that we end up negotiating with Westlake Chemical.

So it's certainly a transaction that I would expect potentially in the first half of the year.

At this time, the Q&A session is 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 first quarter 2019 results.

Thank you for participating in today's Westlake Chemical Partners 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 26, 2019.

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) 437-3406.

The access code is 263-8219.