Westlake Chemical Partners LP (WLKP) 2020 Q4 法說會逐字稿

Good afternoon.

Thank you for standing by.

Welcome to the Westlake Chemical Partners Fourth Quarter 2020 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded today, February 23, 2021.

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, Victor.

Good afternoon, everyone, and welcome to the Westlake Chemical Partners Fourth Quarter 2020 Conference Call.

I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and CFO; and other members of our management team.

During this call, we will 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.

Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners' MLP distributable cash flow.

Definitions of these terms are available on the Partnership's website.

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, the COVID-19 pandemic, extreme weather conditions, our ability to borrow funds and access capital markets at a reasonable cost 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 2020 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 the conclusion of this call.

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 3925687.

Please note that information reported on this call speaks only as of today, February 23, 2021, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay.

I will 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 afternoon, everyone, and thank you for joining us to discuss our fourth quarter and full year 2020 results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $75 million for the fourth quarter of 2020.

Westlake Partners fourth quarter 2020 net income was $15 million or $0.43 per unit.

For the full year, consolidated net income was $341 million.

Westlake Partners' full year 2020 net income was $66 million.

This year proved to be another strong year for Westlake Chemical Partners.

In spite of the unprecedented challenges driven by the impacts of the COVID-19 pandemic lockdowns and production outages caused by hurricanes, Laura and Delta, our earnings for the year remained solid illustrating the strength of our business model.

Let me provide a brief update on the hurricanes' impact in the fourth quarter, with the threat of landfall of Hurricane Delta in October, we idled our facilities in Lake Charles, Louisiana, and we're fortunate to have sustained minimal damage to our facilities.

Once power was restored, we worked quickly to resume operations and begin producing ethylene.

I would like to say a special thank you to our dedicated employees who are vital to restarting these plants.

The solid financial results we experienced in the fourth quarter as well as for the whole year are a testament to the stability generated from our fixed margin ethylene sales agreement for 95% of annual planned production each year, which insulates us from market volatility.

This certainty, combined with our investment-grade sponsor, Westlake Chemical, produces predictable earnings and stable cash flows.

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 and the full year of 2020.

Steve?

Thank you, Albert.

And good afternoon, everyone.

In this morning's press release, we reported consolidated net income including OpCo's earnings of $75 million on consolidated sales of $246 million for the fourth quarter of 2020.

Westlake Partners fourth quarter 2020 net income was $15 million or $0.43 per unit.

The Partnership had distributable cash flow for the quarter of $16 million or $0.44 per unit.

Fourth quarter 2020 net income for Westlake Partners was $15 million, decreased by $2 million compared to fourth quarter 2019 Partnership net income of $17 million.

The decrease in net income was primarily attributable to impacts from the hurricanes and associated force majeure events, lower third-party sales volumes and increased maintenance cost.

Partially offsetting these decreases was the benefit of the $28 million buyer deficiency fee-related to the lost production that would have been sold at Westlake had the force majeure event not occurred.

I will discuss this mechanism in more detail shortly.

Distributable cash flow of $16 million for the fourth quarter of 2020 decreased by $3 million compared to fourth quarter of 2019 distributable cash flow of $19 million.

The decrease in distributable cash flow was attributable to lower earnings, increased maintenance expense and higher turnaround reserves, partially offset by the buyer deficiency fee and reduced interest expense for the quarter.

For the full year of 2020, net income for the Partnership was $66 million.

It increased $5 million from the full year of 2019 net income to the Partnership of $61 million.

The increase in net income attributable to the Partnership was primarily due to higher sales prices for ethylene sold to Westlake for the terms of the ethylene sales agreement as well as the buyer deficiency fee of $70 million, partially offset by lower third-party sales volumes, lower sales volumes to Westlake due to the forest majeure events and increased maintenance expense.

MLP distributable cash flow of $72 million decreased $1 million from the full year of 2019 distributable cash flow of $73 million.

As we discussed last quarter, the provisions in the ethylene sales agreement commit Westlake to purchase and pay for a minimum amount of ethylene from OpCo each calendar year, thus insulating us from a majority of the impacts of these outages during the force majeure events.

Through this commitment, OpCo continues to receive a $0.10 margin per pound for ethylene volumes that would have been produced plus production costs that were incurred, allowing OpCo and in turn, Westlake Partners to deliver consistent earnings during these unplanned events.

The benefit of this provision provides OpCo with a buyer deficiency fee of $70 million for 2020.

This is an example of how our business model provides predictable earnings and cash flows and value to our investors.

Turning our attention to the balance sheet and cash flows, at the end of the year we had a consolidated cash and cash invested with Westlake balanced through our investment management agreement of $140 million.

At the end of the year, Westlake Chemical had a payment obligation to the Partnership of $70 million associated with the previously discussed buyer deficiency fee.

This payment was received in January of 2021 under the terms of the sale agreement.

The long-term debt at the end of the year was $400 million, of which $377 million was at the Partnership and $23 million was at OpCo.

In 2020, OpCo spent $37 million on capital expenditures.

For the fourth quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below 1x and a debt-to-capitalization ratio near 20%.

For modeling purposes, we provide an update on the planned turnaround of our Petro 2 unit that will begin in September of this year and is projected to last approximately 60 days.

The cost of this turnaround has been included in the amount we charge to Westlake Chemical and will be fully reserved for -- at the commencement of the turnaround.

Last week, extreme winter weather across much of the Central and Southern United States has caused widespread power outages and disrupted feedstock, raw materials and utilities to some of our plants.

As a consequence, several of our facilities have experienced some disruption to their operations.

We have triggered a force majeure under our ethylene sales agreement for one of our Lake Charles ethylene units, and we will be benefiting from the buyer deficiency fees from Westlake Chemical.

The Partnership's predictable fee-based cash flow continues to be attractive attribute in today's economic environment and it's differentiated by the consistency of earnings and cash flows.

The structure of our ethylene sales agreement and the associated cash flow coming from this agreement allow the Partnership to continue distributions at our current level while sustaining our long-term targeted 1.1x distribution coverage, thus eliminating the need to access the equity capital markets.

We will continue to evaluate market conditions and assess when and how we apply our 4 growth levers.

On January 25, 2021, we announced distributions of $0.4714 per unit with respect to the fourth quarter of 2020.

Since our IPO in 2014, the Partnership has made 26 consecutive quarterly distributions to our unitholders, and we have grown distribution 71% since the Partnership's original minimum quarterly distribution of $0.275.

For the 12 months ending December 21, 2020, distributable cash flow provided coverage of 1.08x the declared distributions.

The fourth quarter's Partnership distribution will be paid on February 19, 2021, to unit record holders of February 4.

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

Albert?

Thank you, Steve.

We are pleased with the Partnership's solid financial performance.

The stability of our business model was well-illustrated in 2020 as our ethylene sales agreement and its provisions provided us with the predictable earnings and cash flow despite hurricanes and associated unplanned production outages.

Looking into 2021, we remain optimistic about sustained demand for ethylene driven by strong demand for polyethylene and PVC produced by our parent, Westlake Chemical.

Our ethylene sales agreement that provides predictable fee-based cash flow structure from our take-or-pay contract with Westlake Chemical for 95% of OpCo's production will continue to deliver stable and predictable cash flows.

As Steve outlined, we have maintained our distribution, limiting our reliance on the equity markets.

We are excited about the Partnership's future as we deliver long-term value to our unitholders.

We maintained a strong balance sheet with conservative financial and leverage metrics.

As we continue to navigate market conditions, we'll evaluate opportunities via our 4 levers of growth in the future, including increases of ownership interest of OpCo; acquisitions of other qualified income streams; organic growth opportunities, such as expansions of our current ethylene facilities; and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake.

We believe we have the ability to continue to provide long-term value to our unitholders and can further enhance our growth, utilizing our 4 levers as market conditions warrant.

As always, we will continue to operate safely, along with being good stewards of the environment and communities in which we work and live.

Thank you very much for listening to our fourth quarter 2020 earnings call.

Now I'll 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 today at 3:00 p.m.

Eastern Time.

Victor, we will now take questions.

(Operator Instructions)

Our first question is from the line of Matthew Blair from Tudor, Pickering, Holt.

Steve, you mentioned you triggered the force majeure for the Lake Charles ethylene in Q1.

Do you think this payment will be smaller or larger than the $23 million that came in Q4?

We expect the unit to be up and running here in the reasonable near future, and so I expect it to be smaller.

Great.

And then the yield for Westlake LP has improved to 8% or so, does that make you more likely to think about restarting the drop program and resuming distribution growth?

We'll continue to look at opportunities in the marketplace and see if those opportunities, from a capital flow, are there and if they're attractive financially and actionable.

And if there are -- if they are, we'll continue to assess the value proposition that a drop might bring.

And our next question from the line of Steve Byrne from Bank of America.

Albert, you mentioned these 4 levers that you have for growth here, and one of them would be to add additional assets into OpCo.

And I just wanted to ask about the Lotte cracker joint venture, is that an eligible asset that could be included in this -- in an OpCo or the fact that it's a joint venture, does that preclude it?

No, it does not preclude it, and it is an eligible asset.

It is possible to take our interest in that ethylene unit and contribute that into the structure that we have.

Again, it's something that we would call an acquisition when you think of the 4 levers of growth that we have available to us.

And as I mentioned to Matthew just a moment ago, we'll continue to assess the interest in continuing to grow our distributions through added assets such as that.

And if that is viable and actionable, it's something that we'll consider.

(Operator Instructions)

Our next question will come from the line of Jim (inaudible) from Aviation Advisory.

A couple of questions.

First of all, from really mostly related to modeling analysis, you indicated that the force majeure payments, which obviously some of them -- that $70-odd-million that were included in the full -- in the fourth quarter financial results were not actually paid until last month.

So in terms of modeling, if you look at the cash flow statement, unlike in prior years, the cash flow provided by operating activities, more or less match the distributions to -- some of the distributions for the noncontrolling interest on the unitholders in the prior year.

Cash provided by operating activities was significantly greater than the sum of the distributions.

Is it reasonable that doing an analysis that we should add back to the -- add to the net cash provided by operating activities, that $70-odd-million you got from Westlake Chemical in terms of a force majeure payment?

Yes, it is.

Okay.

Next accounting-related question, if you look at the balance sheet, you have a big negative number for the general partner interest.

And in terms -- I'm wondering how to model that in terms of trying to figure out the total enterprise value.

Why is that such a large negative number?

And is the general partner having a distribution rights that are likely to be distributed -- triggered anytime soon?

How should I be modeling that when I'm trying to do price-to-book and TEV-to-EBITDA?

Yes, it simply reflects Westlake's interest in the business.

And so it receives distributions from both OpCo as well as the Partnership every quarter.

So you're looking at the Partnership's balance sheet and it simply reflects the equity interest that the Partnership -- that Westlake Chemical has in the Partnership.

If Westlake is getting a -- because you have 2 -- you have 3 lines, you have common unitholders, publicly and privately held, and that's a large positive number.

You have common unitholder, Westlake, and that's a smaller positive number.

And then you have a general partner, Westlake, and that's a big negative number, negative what didn't change you to -- your $242 million -- negative $242.5 million, why is that such a large negative number?

When I'm trying to calculate price TEV to EBITDA, should I assign any value to the general partner interest?

Yes.

So look at the total Partnership's capital is really how you should look at the total equity value of the Partnership when you look at that.

So the total equity value here is the $915 million looking at the total equity component.

So it's both the noncontrolling piece.

So that's really how you should look at that.

And I'm happy to spend some time with you or Jeff Holy, our Treasurer, to spend some time, either model through these -- if you're looking at both the balance sheet or the distributable cash flows, any of those numbers, I'm happy to spend some time with you to go through the modeling questions you might have.

Okay.

Well, that's good.

I'll follow-up and perhaps we can set a time that's convenient for you.

And just one more thing because I'm only recently invested.

With many of the other master limited partnerships in which I've invested over the years, when I get the K1, typically, it does -- it shows my share of the net income is a net loss.

So all the distributions count as a return of capital.

Am I likely to have a similar experience as an investor in Westlake Chemical Partners?

You will have a large component of your return.

It's really a function of when you chose to invest.

The K1s are live now so that you can receive those online, should you choose to do that.

And certainly, they will have -- they've been mailed within the last few days as well.

So if you're looking for the mail, it should be coming soon.

But you can also log on currently now and receive it electronically.

Okay.

Well, I bought last month, so I'm not getting a K1, but like in terms of -- that's one of the advantages of, as you know, investing in master limited partnerships that -- often the distributions are not considered current income.

So whom should I call or e-mail to set up a time to go over some of these modeling issues?

You can certainly reach out to myself.

This is Steve Bender, and you can send me an e-mail at sbender@westlake.com.

And I'll introduce you to my Treasurer, Jeff Holy, and we'll both walk through the modeling questions that you might have.

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

I'd like to turn the call back over to Jeff Holy for any closing remarks.

Thank you again for participating in today's call.

We hope you'll join us again for our next conference call to discuss our first quarter 2021 results.

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

As a reminder, this call will be available for replay beginning 2 hours after the call has ended.

The replay can be accessed by calling the following numbers: domestic caller should dial (855) 859 2056.

International callers may access the replay at (404) 537-3406.

The access code is 3925687.

This will conclude today's call.

Goodbye.